This is a guest post by Tom Hutchinson, Chief Analyst at Cabot Dividend Investor
Wall Street appeared to have treated the alternative energy movement with collective disinterest for years. Now the trend has become undeniable. And alternative energy values have suddenly become a hot commodity.
The iShares Global Clean Energy ETF (ICLN), which tracks 30 stocks in the Global Clean Energy Index, recently caught fire after going nowhere for more than a decade. ICLN is up 175% over the past year, more than double the 71% return on the S&P 500.
Look at the recent performance of some of the big players in the clean energy space. Electric car company Tesla (TSLA) is up 1,166% in the past two years. The hydrogen fuel cell company Plug Power (PLUG) has developed even better in the last two years with an increase of 1,468%. At the same time, the energy sector, which is composed primarily of fossil fuel companies, has been by far the worst performing sector in the market for nearly every measurable period over the past decade.
It seems that technology has advanced to a crucial level where clean energy is cheaper and more economical. Success brings success. And more and more companies are getting involved.
Alternative energy has been by far the fastest growing energy source for some time. Consumption doubled in the first 18 years of this century. But now things really start. The International Energy Agency (IEA) estimates that the global electricity supply from renewable energies will increase by 50% in the next five years.
The outperformance of clean energy stocks could just warm up. The Biden administration will certainly focus on the climate change agenda. That means more tax breaks and subsidies and other extras for affiliates. More importantly, however, the focus will turn even more attention to the booming alternative energy growth. And investor intrigues will only accelerate.
Of course, it is still difficult to find the companies with the best technologies. And the competition is tough. Corporations will come and go and it may be the Wild West trying to bet on the best. Fortunately, there are several ways that conservative investors can play the burgeoning phenomenon without too much risk. Check out these two low risk alternative energy dividend payers by size.
Alternative Energy Dividend Payer # 1: NextEra Energy, Inc. (NEE)
Utility stocks fill a large niche in any investment portfolio, especially when stock prices get a bit frothy. The sector is the most defensive in the market as earnings are virtually insensitive to business cycles. Stocks also pay high dividends and tend to do very well in downward-looking markets.
It makes sense to look at the biggest and the best. And NextEra is the world’s largest regulated utility and the world’s largest producer of alternative energy. NextEra Energy is on the list of Dividend Aristocrats, a group of 65 stocks in the S&P 500 with more than 25 consecutive years of dividend increases. The full list of Dividend Aristocrats can be found here.
It’s not a regular utility. NEE is really two companies in one. The company has one of the most regulated utilities in the country, which accounts for around 55% of profits and offers steady cash flow, as well as a world renowned alternative energy company, which accounts for around 45% of earnings and is higher up Growth.
Investors love it because they can get the security and income of a utility company and still get high growth and capital appreciation. It’s the best of both worlds.
2020 was another strong performance for NextEra Energy.
Source: Investor Presentation
For the full year, adjusted earnings per share rose by 10.5%.
Over the past 10, 5, 3 and 1 years, NEE has not only significantly outperformed the Utility Index, but has also blown returns in the overall market. The NEE share has generated more than twice as much return as the S&P 500 over the past 10 years (627% on reinvested dividends). It has also more than tripled the index return over the past five years, three years, and one year.
A detailed analysis of NextEra Energy can be found here.
Alternative Energy Dividend Payer # 2: Xcel Energy Inc. (XEL)
Xcel is a smaller and lesser known alternative energy company. But the smaller size can also offer more upside potential.
Xcel is a regulated electricity and natural gas company serving 3.7 million electricity customers and 2.1 million natural gas customers in eight states, primarily in the north and southwest of the United States. With 28% of its electricity sales, Xcel is also one of the largest renewable energy providers in the US in 2019 generated from alternative energy sources.
The utility has invested heavily in clean energy, especially wind and solar power. Xcel now generates about a third of the electricity it gets from these clean sources. The company’s ambitious goal is to reduce CO2 emissions by 80% by 2030 compared to 2005 and by 100% carbon-free by 2050. It is on the right track as CO2 emissions have already fallen by 44% compared to 2005 compared to the end of 2005.
XEL stock has consistently blown utility sector returns. It has also struck the return of the S&P 500 over the past three and ten years. Investors have achieved returns that have outperformed the overall market with far less volatility. The stock has a beta of just 0.27, which means it’s less than a quarter as volatile as the market as a whole.
This kind of steady reliability is good quality in an increasingly volatile market. For this reason, XEL and NEE would currently greatly expand the portfolio of a conservative investor.
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