The stock market enjoyed a strong first half. The S&P 500 rallied nearly 15%, powered in part by growing optimism that the Federal Reserve will begin cutting rates this year.
Falling rates are one of the many catalysts ahead that could give stocks the power to rally in the back half of the year and beyond. Brookfield Renewable(NYSE: BEPC)(NYSE: BEP), Clearway Energy(NYSE: CWEN)(NYSE: CWEN.A), and NextEra Energy(NYSE: NEE) stand out to a few Fool.com contributors for their compelling total-return potential these days. Here's why they look like no-brainer buys heading into the second half of 2024.
Brookfield Renewable has a long runway for growth
Reuben Gregg Brewer (Brookfield Renewable): Right now the story with Brookfield Renewable is its dividend yield, which is 4.7% or so for the corporate share class and an even higher 5.5% for the partnership version. That disbursement has been increased regularly and within Brookfield Renewable's target range of 5% to 9% growth each year. The whole company, meanwhile, is backed by Brookfield Asset Management, a Canadian asset manager with a successful history of investing in infrastructure on a global scale.
That last point is actually very important. Brookfield Renewable is playing the long game because it has the wherewithal to do so, both financially (it has an investment grade-rated balance sheet) and thanks to the backing of its well-heeled parent company. That should allow Brookfield Renewable to weather the swings in the clean energy sector in relative stride. That's on full display today, given that Wall Street has grown disillusioned with clean energy plays like Brookfield Renewable. And it hasn't stopped the company from continuing to push forward with its growth agenda.
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For example, at the end of 2023, Brookfield Renewable, in conjunction with Brookfield Asset Management, bought Duke Energy's fairly large renewable-power business. And the transaction is expected to be immediately accretive, even during a time when Wall Street holds renewables in low regard. If Brookfield Renewable can ink attractive deals in the hard times, imagine what it can do in the good times to come as the world continues its decade's long march toward a lower carbon footprint.
Powerful growth plus a pending catalyst
Matt DiLallo (Clearway Energy): Shares of Clearway Energy declined by about 10% in the first half of 2024. That put them roughly 40% below their peak in 2022 before interest rates started rising. Higher rates have weighed on renewable-energy stocks and companies with higher dividend yields. They increase borrowing costs (slowing growth). High rates also weigh on dividend-stock valuations to push up income yields and make them more competitive compared to lower-risk (and now higher-yielding) alternatives like government bonds. In Clearway's case, its dividend yield has risen to 6.5%.
Rates should shift from a headwind to a tailwind for Clearway and the renewable energy sector in the second half of 2024 and beyond. Many forecasters expect the Federal Reserve to begin cutting rates later this year. That would help lower Clearway's cost of capital, enhancing its ability to fund future growth.
Clearway has continued growing despite higher rates thanks to its capital-recycling strategy. The company wisely cashed in on its thermal assets in 2022. It has been redeploying those proceeds into higher-returning, new renewable-energy investments ever since. The company has either secured or has the line of sight to put that capital to work on new investments. That gives it lots of visibility into its future cash-flow growth. This visibility drives Clearway's view it can continue increasing its dividend toward the upper end of its 5% to 8% annual target range through 2026.
Meanwhile, its growth potential beyond 2026 is starting to come into focus. It has been renewing contracts on its natural gas power plants at high enough rates to potentially increase its dividend toward the low end of its range in 2027. In addition, its improving cost of capital as rates fall will make it much easier to finance future acquisitions. Given the robust demand growth ahead for renewables, it should have no shortage of opportunities. These clear catalysts make Clearway a great stock to buy right now for the long term.
A high-powered dividend growth stock
Neha Chamaria(NextEra Energy): NextEra Energy has an unparalleled foothold in the utility and renewable-energy industries. It is confident of meeting the higher end of its earnings guidance through 2026 and expects to grow its dividend per share by nearly 10% every year through at least 2026, backed by earnings and cash-flow growth. That makes for a strong investing case for the stock right now.
NextEra Energy owns the largest utility in the U.S., Florida Power & Light Company (FPL), and is also the world's largest producer of wind and solar energy. To put some numbers to that, FPL currently has nearly 35 gigawatts (GW) of capacity, while its renewables business has around 34 GW of capacity in operation. The real numbers game, however, begins when you look at NextEra Energy's growth projections and opportunities ahead.
NextEra Energy plans to invest $65 billion to $70 billion in its renewables alone over the next four years and believes it could find opportunities to develop up to 46.5 GW of new renewables capacity through 2027. Meanwhile, the company plans to deploy around $12 billion into solar between 2024 and 2027 to generate more cost-effective power at FPL. Management believes these investments could drive NextEra Energy's adjusted earnings per share by 6% to 8% higher through 2027 and support an annual dividend growth of 10%. If interest rates fall in between as expected, NextEra Energy's growth prospects could look even stronger as it may have to issue debt in the coming years to fund its growth plans.
Although NextEra Energy stock has rallied around 18% year to date as of this writing, it's still down nearly 24% from its all-time highs. Given the company's earnings and dividend-growth projections, NextEra Energy stock looks like a solid buy for 2024 and beyond.
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Matt DiLallo has positions in Brookfield Asset Management, Brookfield Renewable, Brookfield Renewable Partners, Clearway Energy, and NextEra Energy. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Brookfield Asset Management, Brookfield Renewable, and NextEra Energy. The Motley Fool recommends Brookfield Renewable Partners and Duke Energy. The Motley Fool has a disclosure policy.
