The world needs to invest trillions of dollars into building new renewable energy-generating capacity over the coming decades. That should drive supercharged growth for companies focused on building and operating renewable energy assets.
However, despite that growth outlook, many renewable energy stocks have lost significant value over the past few years. The main culprit is rising interest rates, which have driven up their cost of capital, making it more expensive for them to fund their growth.
That headwind should fade as the Federal Reserve starts reducing interest rates, which could come later this year. That upside catalyst, along with the sector's strong growth prospects, positions NextEra Energy Partners(NYSE: NEP), Brookfield Renewable(NYSE: BEPC)(NYSE: BEP), and Clearway Energy(NYSE: CWEN)(NYSE: CWEN.A) to soar later this year and beyond.
Setting a strategy in motion to reduce the impact of higher rates
Shares of NextEra Energy Partners have lost roughly two-thirds of their value from their peak in 2022. That sell-off has driven the company's dividend yield into the double digits. The main issue has been the impact that rising interest rates have had on the company's ability to obtain capital at an attractive rate to refinance existing funding and finance new investments.
NextEra Energy Partners is working to offset this headwind by selling off its natural gas pipeline assets to pay off the convertible equity portfolio financing (CEPF) it used to make acquisitions. It has also slowed its dividend growth outlook to a rate it can support with internally funded organic growth (5%-8% annually through 2026 with a 6% target, down from 12%-15% annually).
The company has already made solid progress on its plan. It sold one of its natural gas pipeline businesses late last year and will use the proceeds to fund CEPF buyouts through June 2025. It also plans to sell its remaining gas pipeline operations next year.
Meanwhile, it has secured over 1.1 gigawatts (GW) of wind repowering projects through 2026, putting it close to its target of 1.3 GW. The execution of its strategy, combined with the eventual decline in interest ratescould give a big charge to its stock price.
Highly visible growth
Brookfield Renewable stock has lost nearly half its value from the peak before the Federal Reserve started cutting rates. That has driven its dividend yield up to nearly 6%.
Brookfield Renewable is in a much better position to handle higher rates than NextEra Energy Partners due to its stronger balance sheet. Because of that, the company hasn't made any changes to its strategy or growth outlook. It expects to grow its funds from operations (FFO) at a double-digit pace through 2028, which should power 5% to 9% annual dividend growth.
The company has a lot of built-in growth, too. Organic drivers, like inflation-linked rate increases, margin enhancement activities, and development projects, should grow its FFO by 7% to 12% per share through 2028, with acquisitions pushing it into the double digits.
The company has already secured a strong growth rate for 2024, powered by deals it completed and secured at the end of last year. With earnings growing by more than 10% annually and a dividend yielding over 6%, Brookfield could easily produce total annual returns in the mid-teens.
Funding and growth secured
Clearway Energy stock has slumped more than 40% from its peak a few years ago. That sell-off has pushed its dividend yield up near 7%.
Like Brookfield Renewable, higher interest rates won't have any near-term impact on Clearway's ability to grow. The clean energy producer expects to increase its dividend toward the upper end of its 5% to 8% annual target range through 2026.
The primary catalyst was cashing in on the company's thermal assets in 2022. Clearway Energy has been using the proceeds from that sale to acquire income-producing renewable energy assets. It has funded or made offers to put those entire proceeds to work in deals that should close through next year. That gives it the line of sight to grow its cash available for distribution up to a level that can support upper-end dividend growth through 2026.
Meanwhile, recent contract extensions for its natural gas power assets provide a foundation for dividend growth in 2027. Add the company's growing income stream to its upside potential as rates fall, and it could produce powerful total returns over the next several years.
Supercharged total return potential
Rising interest rates have weighed on shares of NextEra Energy Partners, Brookfield Renewable, and Clearway Energy, pushing up their dividend yields, but that headwind should fade later this year. That positions these renewable energy companies to generate supercharged total returns in the coming years.
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Matt DiLallo has positions in Brookfield Renewable, Brookfield Renewable Partners, Clearway Energy, and NextEra Energy Partners. The Motley Fool has positions in and recommends Brookfield Renewable. The Motley Fool recommends Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
