The renewable energy industry has hit a bit of a speed bump in recent years. Surging interest rates made it more expensive to fund projects, which has weighed on the sector. Higher rates have also driven down the value of income-producing assets, like renewable energy dividend stocks, boosting their yields.
However, many expect interest rates to start falling in the coming years. That should boost the value of renewable energy stocks, which are benefiting from strengthening decarbonization tailwinds. These catalysts should give top renewable energy producers NextEra Energy(NYSE: NEE) and Clearway Energy(NYSE: CWEN)(NYSE: CWEN.A) the power to soar in 2024 and beyond.
The strong growth should continue
NextEra Energy's stock price currently sits about 20% below its peak in 2022, which was right before interest rates began their ascent. That slumping stock price has helped push the utility's dividend yield up to nearly 3%, more than double the S&P 500's dividend yield.
Shares of NextEra Energy have slumped even though the company has continued growing at an above-average rate. Its adjusted earnings per share rose 9.3% last year and were up 8.3% year-over-year in the first quarter. NextEra Energy's rapidly rising earnings have given it the power to increase its dividend by roughly 10% annually over the past couple of years.
NextEra expects to continue growing at a healthy clip over the next several years. It anticipates growing its adjusted earnings per share by 6% to 8% annually through 2026, with growth likely coming at or near the top end of that range. Further, it plans to deliver dividend growth of around 10% annually through at least 2026. Meanwhile, growth could be even stronger in the future, given the expectations that renewable energy demand will grow at a 13% compound annual rate through 2030. As the country's leading renewable energy developer, NextEra should continue capturing a sizable portion of this surging demand.
With its growth tailwind stronger than ever and interest rates poised to fall, NextEra Energy's stock price could surge over the next several years. Add its attractive and fast-growing dividend, and the utility could produce powerful total returns.
A fully powered growth plan
Clearway Energy's stock price has lost more than a third of its value from the peak in 2022. Surging rates are the primary factor. They've helped push the clean energy infrastructure company's dividend yield up near 6%.
Higher rates have increased Clearway's cost of capital, making it more expensive to issue stock and debt to fund new investments. However, thanks to its capital recycling strategy, the company hasn't needed to access outside funding. Clearway cashed in on the value of its thermal assets a few years ago and has been redeploying the proceeds into higher-returning renewable energy investments.
That strategy powers Clearway's view that it can continue growing its high-yielding dividend toward the upper end of its 5% to 8% annual target range through at least 2026. The company has line-of-sight to deploy all the proceeds from its thermal sale into deals that should close over the next couple of years.
Meanwhile, strong demand for power from its clean natural gas plants is enabling the company to secure higher rates as legacy power purchase agreements expire. That's driving the company's view that it could deliver at least 5% dividend growth in 2027 without making additional investments. However, with interest rates expected to fall, Clearway's stock price should rise. That will reduce its cost of capital, enhancing its ability to invest in new renewable energy assets.
Add the company's high-yielding and steadily rising dividend to the upside potential of its stock price, and Clearway Energy could produce supercharged returns in the coming years.
Powerful return potential
NextEra Energy and Clearway Energy have continued growing at solid rates despite interest rate headwinds. That issue could soon become a tailwind, lifting the weights off their stocks. That catalyst, combined with continued strong growth for renewable energy, could give these stocks that power to surge in the coming years. It makes them great stocks to buy for those seeking income and upside potential.
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Matt DiLallo has positions in Clearway Energy and NextEra Energy. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
