With the U.S. government shifting its focus to address the climate crisis in the coming years, the expectations for good things to come to companies working on renewable energy are rising. While there is a number of solar and electric mobility companies offering very promising prospects, investing in them is not without risk. For clean energy investors looking to balance their portfolios with more stable sources of returns, it turns out that there are a growing number of utilities leading the solar revolution that have been outperforming the S&P 500, with relatively low volatility while paying outsized dividends.
Additionally, the following three stocks have built competitive advantages that should keep them ahead of their peers for years to come. In all cases, we compare these stocks to the performance of the Vanguard S&P 500 Exchange Traded Fund (VOO -0.40%) one of the best S&P 500 ETFs in terms of low fees and an excellent dividend yield.
Dividend investing in renewable energy. Image source: Getty Images.
Follow the (green) money
Over the last decade, a number of large investors have identified renewable energy as a key growth area, with marquee names such as BlackRock (BLK) making a "commitment to integrate ESG information into [all of its] investment processes." One such investor following BlackRock's lead is ARES Management (ARES -1.11%).
ARES is not a utility, per se. It is a global investment manager focusing on credit, private equity, real estate, and strategic investments. Within its private equity practice, the company believes it has identified a $90 trillion opportunity in what it calls "climate infrastructure." It began investing in energy in 2014, and by 2019 it had grown its presence in the electrical utility space substantially, increasing its renewable energy generation capacity by over 1000%, and inking a number of iconic renewable energy deals in the last two years.
What is interesting about ARES is that, not only has its share price vastly outperformed the S&P 500 for the last five years, but it has done so while paying a generous dividend yield -- almost twice the dividend yield of Vanguard S&P 500 ETF fund as of this writing. The chart below compares the performance of ARES vs. the Vanguard ETF assuming dividends are re-invested:
Performance of Ares Management vs. Vanguard S&P 500 ETF (total return, normalized) data by YCharts
A steady performer with lots of upside
Algonquin Power and Utilities Group (AQN 0.79%) has been a renewable energy pioneer for well over two decades. Two decades is like a millennium in clean energy years. The company is taking advantage of its leadership and track record in wind and solar project deployment by proceeding to sign multi-year development agreements with large corporate clients -- which should lead to continued growth in the coming years.
Algonquin's stock price has doubled in the last five years, outperforming the S&P 500 by a substantial amount, while paying a dividend yield that has remained well over 3.5% for most of that time -- again, almost twice that of the Vanguard S&P 500 ETF as of this writing.
Performance of Algonquin vs. Vanguard S&P 500 ETF (total return, normalized) data by YCharts
Go with the leader
It's difficult to overstate NextEra Energy's (NEE -0.10%) leadership in renewable energy in the U.S. -- and the extent to which the company has benefited from its leadership. Since its first investments in wind energy in 1998, the company has gone on to become the largest publicly traded utility in the U.S.,and the fourth cleanest utility worldwide. Its investments in renewables have helped the company to consistently lower what it spends on fuels and to grow its profit margins for the last 10 years. This has resulted in its stock price nearly tripling the performance of the S&P 500, with a dividend yield in the range of Vanguard's S&P 500 ETF.
Performance of NextEra Energy vs. Vanguard S&P 500 ETF (total return, normalized) data by YCharts
The green revolution -- as in the profits revolution
Renewable energy today is among the cheapest forms of energy available -- and only getting cheaper. Investors and utilities alike have been turning to renewable energy as a way to maximize profits while contributing to much-needed climate action. The visionary companies that got an early start developing and financing clean energy projects have an advantage in terms of access to capital and technical expertise that reflects positively in their growth and profitability. For the companies above, those advantages translate into faster, yet consistent stock appreciation and generous dividends.
