One area of investment that will become increasingly important is renewable power/energy. It will be a secular growth trend that you should highly consider investing in — at the right price.
Governments and businesses around the globe are looking to reduce our carbon footprint and eventually reach net-zero emission by 2050. According to Bloomberg New Energy Finance, the geographies, the European Union, and the United Kingdom, which are most advanced in this respect, are at roughly 38% renewable generation. China and India are at 28% and 19%, respectively, which means there will be a 30-year shift to renewables.
Three renewable power stocks to put on your radar
The chart below shows the price action of three representative renewable power stocks that have more or less moved in tandem in the past five years. As you can see, their stock prices have appreciated in the long run.
Data by YCharts. The five-year price action of BEP.UN, AQN, and NPI.
Notably, other than persistent price appreciation, Brookfield Renewable Partners (TSX:BEP.UN)(NYSE:BEP), Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN), and Northland Power (TSX:NPI) also pay nice dividend income.
Here are the five-year total returns (dividends + price appreciation) of the stocks:
- BEP.UN: Total returns of 185% or annualized returns of about 23.2%
- AQN: Total returns of 148% or annualized returns of about 19.8%
- NPI: Total returns of 170% or annualized returns of about 21.9%
They beat the S&P 500’s total return of 76% (or 12% per year) in the period. It follows that they also greatly beat the Canadian stock market that tends to underperform the U.S. market.
$10,000 invested in each stock five years ago would have generated this much dividends:
- BEP.UN: About $3,343 dividend income
- AQN: About $3,312 dividend income
- NPI: About $3,311 dividend income
A quick overview of the dividend stocks
Brookfield Renewable invests, operates, and develops renewable power assets across hydro, wind, and solar power in North & South America, Europe, and Asia.
Additionally, it has distributed generation and power storage assets. Specifically, it has 19,300 megawatts of capacity across 27 markets in 17 countries.
BEP is the indisputable leader in the space. It aims for long-term returns of 12-15% on its investments.
Algonquin has regulated natural gas, electric, and water utilities that make up about 65% of its business. Its US$9.2 billion five-year plan has 70% in regulated opportunities.
AQN also has 2,200 megawatts of installed capacity in its renewable energy portfolio that’s sourced wind, solar, hydro, and thermal energy. This portfolio is largely underpinned by long-term contracts. So, investors can expect a similar kind of stable growth over the next five years.
Northland Power’s renewable portfolio has nearly 2,700 megawatts of capacity, sourcing energy from wind, gas, biomass, and the sun. It has operations in North and South America, Asia, and Europe.
Should you buy the stocks now?
While all three utility stocks are great businesses, they’re not great buys right now. Particularly, the shares of BEP and NPI have appreciated about 52% and 46% year to date. Their stock prices have simply run up too fast, too soon. All three stocks are either fully valued or overvalued.
Data by YCharts. Year-to-date price action of BEP.UN, AQN, and NPI.
Because of the stock price run-ups, their yields have also become much less compelling. At writing, BEP, AQN, and NPI, respectively, yield 3.3%, 4%, and 2.9%.
Data by YCharts. Yield history of the three utility stocks.
Interested investors should aim to buy them at more attractive valuations. If they fall 10-30% over the next year or two, they’d be better entry points. Another scenario is that the utility stocks could consolidate before their next leg up.
An extreme example is Microsoft stock that traded in a sideways channel for about 10 years after the Internet bubble before it finally broke out.
The Foolish takeaway
Investors should highly consider investing in the renewable energy/power secular trend. They can do so via BEP, AQN, or NPI. However, the stocks are on the expensive side currently. Interested investors should seek to start buying on dips of 10-30% in the short term or when the stocks break out after a consolidation period.
