With the clean energy revolution in full swing, these two low-risk alternative energy stocks are a safe way for conservative investors to play the trend.
Alternative energy, also referred to as renewable or clean energy, has been a story that’s been knocking at the door for a while now. But lately, a certain critical mass in growth and development seems to be taking place. The market usually gets it. And it’s telling us something.
The iShares Global Clean Energy ETF (ICLN), which tracks 30 stocks in the Global Clean Energy Index, has recently caught fire after going nowhere for more than a decade. ICLN soared 103% over the past year and 180% for the past two years, compared to S&P 500 returns of 28% and 46%, respectively, over the same period.
Consider the recent performance of some of the big players in the clean energy space. Electric car company Tesla (TSLA) has soared 1,140% in the last two years. Hydrogen fuel cell company Plug Power (PLUG) moved 939% higher in just the last year. At the same time, the energy sector, which is primarily constituted of fossil fuel companies, has been by far the worst performing sector of the market in just about every measurable period over the last 10 years.
What’s going on?
It appears that the technology has developed to a crucial level were clean energy is cheaper and makes more economic sense. Success breeds success. And more and more companies are getting involved.
Alternative energy has been by far the fastest-growing energy source for a while, with usage doubling in the first 18 years of this century. But it’s about to really take off now. The International Energy Agency (IEA) estimates that global renewable power supply will grow 50% in just the next five years.
The outperformance of clean energy stocks may just be getting warmed up. The Biden Administration will surely focus on the climate change agenda. That means more tax breaks and subsidies and other goodies for related companies. But even more importantly, the focus will draw still more investor attention to the booming growth in alternative energy. And investor intrigue will only accelerate.
Of course, it’s still tricky to find the companies with the best technologies. And competition is fierce. Companies will come and go and it can be the Wild West trying to bet on the best ones. Fortunately, there are a couple of ways for conservative investors to play the burgeoning phenomenon without too much risk. Try these two low-risk alternative energy stocks on for size.
Low-Risk Alternative Energy Stock #1: NextEra Energy, Inc. (NEE)
Utility stocks fill a great niche in any investment portfolio, especially when stock prices get a little frothy. The sector is the most defensive on the market as earnings are virtually immune to economic cycles. Stocks also pay high dividends and typically hold up very well in down markets.
It makes sense to look to the biggest and the best. And NextEra is the world’s largest regulated utility and the world’s largest producer of alternative energy.
It isn’t a regular utility. NEE is really two companies in one. It has one of the best regulated utilities in the country, which accounts for about 55% of earnings and provides steady cash flow, and also a world-renowned alternative energy company, which accounts for about 45% of earnings and provides a higher level of growth.
Investors love it because they get the safety and income of a utility and still get great growth and capital appreciation. It’s the best of both worlds.
For the last 10-, five-, three- and one-year periods, NEE has not only vastly outperformed the Utility Index, it has also blown away the returns in the overall market. NEE stock has returned more than double that of the S&P 500 over the last 10 years (627% with dividends reinvested). It has also more than tripled the index return over the last five years, three years and one year.
Low-Risk Alternative Energy Stock #2: Xcel Energy Inc. (XEL)
Xcel is a smaller and less well known alternative energy utility. But the smaller size may also provide more potential upside.
Xcel is a regulated electric and natural gas utility serving 3.7 million electric customers and 2.1 million natural gas customers in eight states, primarily in the northern and southwestern U.S. It is also one of the largest renewable energy providers in the U.S. with 28% of electricity sales generated from alternative energy sources in 2019.
The utility has been heavily investing in clean energy, primarily wind and solar power. Xcel now generates about a third of the electricity it delivers from these clean sources. The company has an ambitious goal of reducing carbon emissions 80% by 2030, from 2005 levels, and being 100% carbon free by 2050. It’s on track as carbon emissions are already down 44% from 2005 levels, as of the end of 2019.
XEL stock has consistently blown away the returns of the utility sector; it’s also beaten the return of the S&P 500 over the past three- and 10-year periods. Investors have gotten returns that have bested the overall market with far less volatility. The stock sports a beta of just 0.23, meaning it is less than one quarter as volatile as the overall market.