Investing in Renewable Energy Stocks

The global economy is rapidly working on switching energy sources. Due to climate change concerns, the world is moving away from carbon-based fossil fuels to cleaner alternative energy sources, including renewable energy. The decarbonization of the global economy will take an estimated investment of more than $150 trillion over the next three decades.

Renewable energy will play a crucial role in this energy transition. Here's a closer look at how to invest in the renewable energy industry.

Why invest?

Why invest in clean energy stocks?

Renewable energy sources, such as wind, solar, and hydroelectric power, currently supply about 20% of the electricity generated by the U.S. power sector. The industry has been growing briskly, quadrupling its electricity-generating capacity over the past decade. Given increasing climate change concerns, the pace has quickened in recent years. It needs to continue accelerating to help rapidly decarbonize the economy.

Climate change is forcing companies and other institutions to focus on how they can do their part to decarbonize. Many companies are signing power purchase agreements (PPAs) with electric utilities and other electricity generators to specifically buy power produced from renewable sources.

Meanwhile, others are investing directly in renewable energy development projects. Some are making renewable investments to be viewed as socially responsible global citizens. However, clean energy is increasingly economical due to the falling costs of solar panels, wind turbines, and batteries for energy storage. That's making the sector a more attractive investment opportunity.

Governments are also working to accelerate global decarbonization by proposing and passing legislation to increase investment in the sector. For example, in 2022, the U.S. Congress passed the Inflation Reduction Act. The legislation will drive $369 billion in energy security and climate change investments.

Many view spending packages like that as only a down payment on the investment needed to decarbonize the economy. This view suggests that future legislation could further boost the country's investment level.

Five top renewable energy stocks in 2023

Five top renewable energy stocks in 2023

Many companies focus on renewable energy, putting them in an excellent position to benefit from this investment megatrend. However, a few energy companies stand out above their peers as the best renewable energy stocks to buy. Top-tier green energy companies include:

Here's a closer look at these leading renewable energy stocks.

1. NextEra Energy

1. NextEra Energy

NextEra Energy is one of the world's largest producers of wind and solar energy. It generates power at its Florida utilities and its energy resources segment, which sells electricity under PPAs to other utilities and large corporate buyers.

Few companies are betting bigger on renewable energy than NextEra Energy. The utility unveiled its Real Zero plan in 2022 to eliminate carbon emissions from its operations by 2045. It aims to significantly expand its solar energy and storage capacity while replacing natural gas in its power plants with green hydrogen and renewable natural gas.

NextEra has an excellent track record of creating shareholder value by investing in renewable energy. It has produced a total return of more than 260% during the past 10 years. Its above-average growth rate has powered strong investment returns. NextEra has expanded its adjusted earnings per share (EPS) at a 9.8% compound annual rate since 2012. Meanwhile, it has boosted its dividend at an 11% annual rate during that period, pushing its growth streak to more than 25 consecutive years.

The company expects its investments to continue paying dividends to shareholders. It predicts earnings will increase at or near its 6% to 8% annual target range through at least 2026, powered by continued investments in renewable energy. NextEra expects to deliver around 10% annual dividend growth through at least 2024. Meanwhile, it is likely to maintain one of the best balance sheets in the utility sector, giving the company the financial flexibility to continue expanding.

2. Brookfield Renewable

2. Brookfield Renewable

Brookfield Renewable is a global leader in renewable energy. It's one of the world's largest producers of hydroelectric power, which will make up 50% of its portfolio in 2023. Brookfield also has been increasing its wind (onshore and offshore), solar (utility-scale and distributed generation, such as rooftop solar), and energy storage expertise. The company sells the bulk of its power under long-term PPAs that generate steady cash flow.

Brookfield has an excellent track record. Since its inception, the company has generated an annualized total return of 16%. The steady expansion of its portfolio through acquisitions and development projects has driven its growth. Brookfield's earnings have increased at a compound annual rate of more than 10% over the past decade. That helped power a 6% compound annual growth in its dividend payments since 2014.

Brookfield sees even more growth ahead -- annual EPS growth of more than 10% through 2028 -- powered by its extensive pipeline of renewable energy development projects and additional acquisitions. This earnings growth should enable the company to hike its dividend by 5% to 9% annually -- making it one of the best renewable energy dividend stocks. It expects to maintain a top-notch balance sheet, giving it the financial flexibility to keep expanding.

3. Clearway Energy

3. Clearway Energy

Clearway Energy is one of the largest owners of renewable energy generating facilities in the U.S. It complements its wind and solar energy portfolio with highly efficient facilities powered by natural gas. Clearway also sells its power via PPAs that generate a steady cash flow for the company.

The company sold its thermal business in 2022, generating $1.35 billion in cash to spend on expanding its renewable energy operations. It has been steadily putting money to work by acquiring renewable energy assets. The deals are providing the company with increasing visibility for its ability to increase its dividend.

As a result of its deals, Clearway Energy now expects to be able to hike its dividend towards the high end of its 5%-to-8% annual target range through at least 2026. Meanwhile, it anticipates maintaining a solid financial profile. Clearway Energy is positioned to continue capitalizing on opportunities to increase its renewable energy operations in the coming years while creating substantial value for shareholders in the process.

4. First Solar

4. First Solar

First Solar develops and manufactures thin-film solar panels that use their larger size to generate more energy than competing technologies. That makes them ideal for utility-scale solar energy projects.

As one of the world's leading solar panel makers, the company is in an excellent position as demand for solar panels accelerates. It's actively investing to increase its capacity to produce solar panels and meet demand. As of 2023's second quarter, it has contracts in place to sell panels stretching out into 2030, giving it significant visibility into future revenue.

First Solar has the means to continue expanding because it boasts one of the best balance sheets in the sector. Even with its heavy investments in building new manufacturing capacity, the company expected to end 2023 with $1.5 billion to $1.8 billion in net cash. The cushion gives it tremendous financial flexibility to continue expanding to capitalize on the increasing demand for solar panels. It broke ground on a new $1.1 billion manufacturing facility in Louisiana in late 2023 that should start producing in 2026.

It also has the flexibility to make acquisitions to enhance its technology. For example, in 2023, First Solar acquired leading European thin film company Evolar to improve its ability to develop next-generation solar technology.

5. SolarEdge Technologies

5. SolarEdge Technologies

SolarEdge Technologies develops and manufactures an optimized inverter system. This component maximizes the power produced by solar panels, helping to lower the cost of energy generated by the system. Like First Solar, SolarEdge Technologies should benefit from the accelerating growth of solar energy worldwide.

The company has also started to leverage its expertise in inverters to create other smart energy solutions. It has expanded its offerings by making a series of acquisitions to gain technology, expertise, and products that address several energy market segments, including solar, storage, electric vehicle charging, batteries, uninterruptible power supplies, electric vehicle powertrains, and grid services solutions.

SolarEdge Technologies has been able to expand further into smart energy solutions, thanks in part to its strong financial profile. The company's core inverter business is profitable and generates lots of cash. It had almost $900 million of net cash at the end of its second quarter in 2023, giving it the flexibility to continue expanding to further capitalize on the decarbonization megatrend.

Returns

Strong returns for investors

Climate change and socially responsible investing are major catalysts for the clean energy revolution. The trend will drive trillions of dollars of investment in renewable energy in the decades ahead.

Although the rising tide of clean energy should lift all boats, the top renewable energy stocks should generate some of the best returns for investors. Green energy companies that have already proven to be value creators and have the financial strength to capture opportunities should yield outsize total returns in the coming years.

FAQ

Expert Q and A

Expert Q&A on renewable energy

The Motley Fool got the chance to chat with investing expert Professor Priya Parrish of University of Chicago Booth School of Business. Here's what Parrish had to say about investing in the renewable energy realm.