What if you could invest $10,000 right now, sit back, and watch it grow manifold over time? It’s entirely possible to build wealth this way, and one of the best ways to do it is to buy stocks poised to ride megatrends in the coming years. Think of compelling massive megatrends like renewable energy.
Renewable energy is the undisputed future of energy. When demand for traditional fuels declined in 2020, global-renewable energy consumption grew 3% according to the U.S. International Energy Agency (IEA). With the share of renewables in total global electricity generation projected to jump from 29% in 2020 to 45% by 2040, there’s no way investors should miss an opportunity to buy renewable-energy stocks, especially now that the Biden administration is also planning heavy investments in clean energy.
So if you’ve got cash, here are three top renewable-energy stocks you’d want to buy for the long haul.
The best renewable-energy dividend stock you could own
NextEra Energy Partners owns and operates a large portfolio of wind and solar assets and sells power to third parties under long-term contracts. It has more than 5.8 gigawatts (GW) of solar wind and solar capacity and also owns eight natural gas pipelines.
Two big factors make NextEra Energy Partners such a compelling stock. First is the backing of its parent, NextEra Energy (NYSE:NEE), which is already the world’s largest producer of wind and solar energy. NextEra Energy’s backlog is growing rapidly, and given the relationship between the two companies, NextEra Energy Partners should grow as long as NextEra Energy’s asset base grows.
Second is NextEra Energy Partners’ focus on generating cash flows from assets and passing them on to shareholders as dividends. That’s easy, as its cash flows are contracted and therefore stable.
NextEra Energy Partners is, in fact, a rare growth plus income hybrid stock — it is targeting 12%-15% average annual growth in dividends through 2024 backed by cash-flow growth. Following its recently announced strong second-quarter numbers and a big acquisition, this 3.4%-yielding clean energy is appealing.
Strong cash flow and dividend growth ahead
Brookfield Renewable (NYSE:BEP) (NYSE:BEPC) is another company that could make a killing in renewable energy. It’s similar to NextEra Energy Partners as it’s also backed by Brookfield Asset Management, but Brookfield Renewable doesn’t necessarily rely on acquisitions from parent to grow its cash flows. Also, it has a humongous 21 GW capacity in operation and another 27 GW under development.
The key difference — one that could also help you diversify your portfolio — is that while NextEra Energy Partners focuses on solar, wind, and natural gas, Brookfield Renewable is primarily a hydropower play and has only recently started to expand its solar portfolio. Brookfield Renewable has solid international presence and a robust balance sheet, and it generates much of its cash flows under long-term contracts. But its growth potential is the real reason you should own the stock.
Between 2010 and 2020, the company grew funds from operations (FFO) at a compound annual growth rate of around 10%. Through 2025, inflation escalation, margin growth, and its pipeline development alone could boost Brookfield Renewable’s FFO by 6%-11%. And if management can find meaningful acquisition opportunities like it has in the past, it could boost FFO by another 9%.
That’s incredible growth potential, and enough to power up Brookfield Renewable’s dividends. For now, management is targeting 5%-9% growth in annual dividend in the long term.
Dividend growth is, in fact, one big reason the story for both NextEra Energy Partners and Brookfield Renewable has played out so well so far. There’s little doubt these stocks will stop growing.
The market doesn’t like this stock, but you might
While renewable-energy generation and financing stocks like NextEra Energy and Brookfield Renewable enjoy a lot of attention, an oft-overlooked yet critical segment of the industry is equipment suppliers. That’s why niche companies like TPI Composites (NASDAQ:TPIC) go unnoticed, but then, that’s also where contrarian investors can find opportunities.
TPI is the world’s largest independent manufacturer of wind blades and serves leading onshore wind turbine manufacturers, including Vestas, Nordex, Siemens Gamesa, and General Electric‘s renewables arm. Of late, TPI shares have tanked on decelerating profits and cash flows, but investors could be missing the big picture.
TPI’s top line is growing steadily: If it hits the midpoint of its revised 2021 revenue guidance at $1.8 billion, TPI would have grown revenue at a solid compound annual rate of 18.5% in five years. Also, thanks to steady order inflow and production expansion in recent years, TPI’s estimated megawatts — or the energy it can produce from all wind blade sets manufactured during the year — shot up to 12,080 megawatts in 2020 from only 6,560 megawatts in 2018.
Most importantly, TPI’s capital expenditure is tapering after years of investment, which means it could soon head back to its positive free-cash-flow days. That should be enough to propel the stock price higher.
Another growth avenue is TPI’s transportation business, which manufactures solutions for commercial electric vehicles. It’s a tiny business for now, but the electric-vehicle industry has mind-boggling growth potential, and with TPI targeting $500 million in annual revenue from the segment in the long term, I wouldn’t be surprised to see management focus more on this business to diversify beyond wind energy. Now that’s an intriguing option, and one that should do well for the stock.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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