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 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 in clean energy stocks?

Renewable energy sources, such as wind, solar, and hydroelectric power, currently supply about 20% of the electricity generated by the power sector. The industry has been growing briskly, quadrupling its electricity generating capacity over the past decade. However, given increasing climate change concerns, the pace has quickened in recent years. It needs to accelerate 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. Although some are making renewable investments to be viewed as socially responsible global citizens, clean energy is increasingly economical due to falling costs for solar panels, wind turbines, and batteries for energy storage, 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. President Biden signed a $1.2 trillion infrastructure package in November 2021 that includes funding to accelerate clean energy investments. Meanwhile, Congress worked through the summer of 2022 to reach agreement on a $369 billion climate and tax bill to accelerate the country’s transition away from fossil fuels.

Many view these spending packages as only a down payment on the investment needed to decarbonize the economy, suggesting that future legislation could further boost the country’s investment level.

Five top renewable energy stocks in 2023

Many companies focus on renewable energy, putting them in an excellent position to benefit from an 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:

Data source: Ycharts. Market cap data as of January 10, 2023.
Renewable Energy Stock Ticker Symbol Market Capitalization
NextEra Energy (NYSE:NEE) $167.2 billion
Brookfield Renewable (NYSE:BEP) (NYSE:BEPC) $5.0 billion
Clearway Energy (NYSE:CWEN) (NYSE:CWEN.A) $6.2 billion
First Solar (NASDAQ:FSLR) $17.9 billion
SolarEdge Technologies (NASDAQ:SEDG) $15.9 billion

Here’s a closer look at these leading renewable energy stocks:

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 power under PPAs to other utilities and users.

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 almost 1,000% over the past 15 years. Its above-average growth rate has powered strong returns. NextEra has expanded its adjusted earnings per share at an 8.4% compound annual rate since 2005. Meanwhile, it has boosted its dividend at a 9.8% annual rate. NextEra has increased its dividend for more than 25 consecutive years, earning it the Dividend Aristocrat distinction.

The company expects its investments to continue paying dividends for shareholders. It predicts earnings will increase at or near its 6% to 8% annual target range through at least 2025, 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

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 2022. 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 18%. The steady expansion of its portfolio through acquisitions and development projects has driven its growth. Brookfield’s earnings have increased at a more than 10% compound annual rate over the past decade, fueling 6% compound annual growth in its dividend payments since 2012.

Brookfield sees even more growth ahead — as much as 20% annually through 2026 — powered by its extensive pipeline of renewable energy development projects and additional acquisitions. The projects 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

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 proceeds 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 on 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.

Off shore wind turbines (Digital Composite)

Source: Getty Images

4. First Solar

First Solar develops and manufactures thin-film solar panels that use their larger size to generate more energy than competing technologies, making 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 to capitalize as demand for solar panels accelerates. It’s actively investing to increase its capacity to produce solar panels and meet demand. As of 2022’s second quarter, it had sold out all its capacity through 2024 except for a new plant being built in India. Meanwhile, it has contracts in place to sell panels stretching out into 2026, 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 2022 with $1.3 billion to $1.5 billion in cash. The cushion gives it a tremendous amount of financial flexibility to continue expanding so it can capitalize on the increasing demand for solar panels.

5. SolarEdge Technologies

SolarEdge Technologies develops and manufactures an optimized inverter system. The 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 (UPS), 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 $1 billion of net cash in 2022, giving it the flexibility to continue expanding to further capitalize on the decarbonization megatrend.

Related investing Topics

The top renewable energy stocks should generate 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.

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

More on Energy investing

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.

Expert Advice

The Motley Fool: What is renewable or green energy?

Professor Parrish: Energy generated from natural resources that does not product pollution. Solar, wind, and geothermal are examples of green energy sources that are also renewable. There are a number of businesses and investment opportunities related to the renewable energy sector, from infrastructure to financing and workforce development.

The Motley Fool: What’s your advice for someone looking to invest in renewable energy?

Professor Parrish: Investors with a genuine passion for and commitment to sustainability are more likely to succeed, as the market is complex and changing fast. Entrepreneurs in this sector are also more driven to take capital from those firms with a mission alignment. This is related to the need for sustainability investors to understand these markets in-depth from multiple angles.

This includes:

  • Both the supply and demand drivers
  • Policy and regulatory factors
  • Business models and operational considerations
  • Supply chain risks

We see successful investors bringing forward both operating experience in the energy, utilities, or infrastructure industries as well as a sound understanding of energy and commodity markets and policies.

The Motley Fool: What are some of the pros and cons of investing in renewable energy?

Professor Parrish: Investing in secular growth trends that are tied to real societal needs provides a strong investment backdrop for long-term investors. However, in the past few years we have seen an influx of capital looking to invest in sustainability deals as there is growing awareness of the opportunity. Many of these investors are unsophisticated and can create market noise. For investors willing to invest in developing a deep knowledge of renewable technologies, markets and companies, I think it is an opportunity worth pursuing.

The Motley Fool: What are some emerging areas of renewable energy? Are you particularly optimistic about any of them?

Professor Parrish: In addition to energy transition, we are optimistic about related opportunities in waste reduction, climate risk management in the supply chain, sustainable food and agriculture, and carbon capture.

Renewable Energy FAQs

The green energy sources include:

  • Wind
  • Solar
  • Hydro
  • Biomass
  • Geothermal
  • Ocean waves and currents
  • Green hydrogen

The clean energy sector represents a massive opportunity for investors. However, investors must pick stocks carefully, since not all will capture the full extent of this opportunity. Two key characteristics to look for are a strong balance sheet and a solar energy-focused growth profile, since those factors could give a company the power to generate higher returns.

Matthew DiLallo has positions in Brookfield Renewable, Brookfield Renewable Partners, Clearway Energy, First Solar, NextEra Energy, and SolarEdge Technologies. The Motley Fool has positions in and recommends Brookfield Renewable and NextEra Energy. The Motley Fool recommends Brookfield Renewable Partners, First Solar, and SolarEdge Technologies. The Motley Fool has a disclosure policy.