Today, I’m looking at how Foolish investors might position themselves to reap the rewards.

Renewable energy goes mainstream

Thanks to concerns over global warming, the drive towards greener sources of energy has increased exponentially over the last few years. The pace of demand is only likely to accelerate further following Joe Biden’s recent US election win. After all, the Democrat made a commitment to clean energy a huge part of his campaign to secure the White House.

In sharp contrast to all this, oil stocks such as BP and Royal Dutch Shell have been out of favour for most of 2020 as a result of the pandemic. The FTSE 100 tankers have seen their share prices pummeled as a consequence of the huge reduction in travel hitting demand for oil. Junior oil stocks have fared even worse.

Now, I don’t doubt we could see the price of the slippery stuff recover strongly as some form of normality returns in 2021 and demand increases. Even so, I can’t help but think investors will miss out on bigger gains by remaining loyal to oil stocks. As much as BP and Shell are trying to improve their green credentials by reducing their carbon footprints, no one should assume this move will be easy or cheap.

No, I’m looking for companies that are already making strides in the renewable energy space. 

Tap into the trend

UK retail investors certainly aren’t short of options when it comes to playing the theme.

Naturally, they could buy shares in individual companies. FTSE 100 member and catalyst system supplier Johnson Matthey is arguably one example. It has an interest in battery materials and hydrogen-related technology. Utility firm SSE plans to triple its renewable energy generation within the next 10 years. Lower down the market, there’s fuel-cell tech business Ceres Power Holdings and clean-fuel firm ITM Power. 

An alternative to the above would be to buy an investment trust focused on this space. FTSE 250-listed Renewables Infrastructure Group owns wind and solar farms, as does Greencoat Renewables.

Cheap exposure

My option of choice however, is the geographically-diversified iShares Global Clean Energy UCITS ETF.

With a cheap ongoing charge relative to ‘active’ equivalents (0.65%), this exchange-traded fund has holdings in companies such as US hot stock Plug Power, home energy storage firm Enphase Energy and New Zealand electricity generator Meridian Energy.

A concentrated portfolio of 31 holdings could mean a volatile ride for holders. But owning this fund over stocks in specific renewable energy companies whose technologies aren’t necessarily proven feels far less risky. That said, returns should be turbocharged if this relatively small portfolio performs. Given the nailed-on industry tailwinds, I think the odds are in my favour.

As one might expect, the recent performance of the fund has been superb. In the year to date, iShares Global Clean Energy has almost doubled in value! I’m not expecting gains like this too often but I can’t see an end to this purple patch just yet.

I’m backing up the truck whenever I can.

The post Forget oil shares. I think renewable energy stocks could be millionaire-makers! appeared first on The Twelfth Magpie.

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Paul Summers owns shares in iShares Global Clean Energy UCITS ETF. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The UK became the first major economy to pass a net-zero emissions law in 2019. This requires various industrial sector companies to eliminate all greenhouse gas emissions by 2050. Contrary to popular belief, the transition to net-zero emissions appears to be progressing well. In 2018, UK emissions were 44% lower than levels in 1990, primarily due to innovations in the energy sector.

Today renewable energy technologies generate approximately 46% of electricity. Wind farms generate 33% of that. 

A renewable opportunity in the FTSE 250?

Greencoat UK Wind (LSE:UKW) is an investment trust that specialises in UK wind farms. It allows investors to indirectly own wind turbines and profit from the electricity they generate.

The business is quite simple. Led by the board of directors, the trust identifies critical wind assets around the country and adds them to the portfolio.

Greencoat sells the energy directly to the national grid. It invests profits into future investments and pays them out as dividends to shareholders. Running wind farms is not a particularly capital intensive operation. Excluding maintenance costs, the remaining expenses are negligible, allowing for an average operating profit margin of over 80%. This level of profitability is partly due to only 17% of owned wind farms being located off-shore. These are typically more expensive to maintain. 

Management has also enacted financial restrictions that shield shareholders from unnecessary risk. For example, the firm cannot have more than 40% debt as part of the capital structure.

Source: Greencoat

The financials

Greencoat’s 2019 income statement reveals an over 60% decline in revenues from the prior year. This decline was a result of multiple faults in several farms that were taken offline for repairs.

In the most recent interim report, the company announced it had fixed these faults. Revenue for the first half of 2020 currently stands at £135m with an estimated final revenue of £270m. This represents a 200% and 16% increase in revenue compared to 2019 and 2018, respectively. While this is undoubtedly good news, it does reveal how much damage a few faults can have on the overall performance of the business – an ongoing risk.

Lack of price power is another unavoidable issue. Approximately 50% of all revenues are exposed to the floating power price. With legislation capping energy prices, there is little room for electrical price appreciation.

The bottom line

Joe Biden is set to be the 46th US president, and the market is enjoying large returns from the ‘Biden Bounce’. The additional pressure on the global energy sector to transition to renewable energy may result in new innovations in wind farm technology.

Despite its limitations, the FTSE 250 stock has become the UK’s leader in wind generation. The dividend remains linked to retail price index inflation and at current prices represents a 5.3% yield that has been steadily increasing by 4% each year. Mixing low reliance on debt, continuous cash flow, a handsome dividend, and a very windy country, creates a recipe for success in my eyes.

The post Biden bounce! 1 cheap FTSE 250 stock I’d buy today appeared first on The Twelfth Magpie.

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• These 3 shares could deliver a £1,840 second income in an ISA overnight!

Zaven Boyrazian does not own shares in Greencoat UK Wind. The Motley Fool UK has recommended Greencoat UK Wind. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

But there are only a handful of ways investors can play this trend right now, and one of those is the Greencoat Renewables (LSE: GRP).

Wind dividends

This business owns and operates wind farms across Ireland. In total, Greencoat has full ownership of nine wind farms and stakes in a further four.

Today it announced that it is expanding this portfolio with the acquisition of Gortahile wind farm in County Laois, Ireland. This 20-megawatt wind farm was commissioned in August 2010 and has a guaranteed minimum price floor on the electricity it generates.

Finding assets that have a minimum price floor has been a critical component of Greencoat’s strategy. This minimises the risk for the company and its investors.

In the first six months of the year, the firm generated €27.1m in net cash, to be returned to investors and reinvested back into growth.

Based on current City forecasts, shares in the renewable energy business are set to support a dividend yield of 5.2% this year. They trade at a forward P/E of 11.4, which isn’t too demanding for a company with a virtually guaranteed minimum income stream and market-beating dividend yield.

UK focus

Another play on renewable energy in the UK is Greencoat Wind (LSE: UKW). This is the UK-focused version of Greencoat Renewables. The business owns a range of wind farms across the UK with a total net asset value of £2.4bn at the end of its most recently reported financial period.

Management has been steadily growing the portfolio ever since Greencoat’s IPO in 2013. Through a combination of borrowing and the issue of new shares, the company’s book value has increased by more than 440% since its listing.

As the number of assets owned by Greencoat has grown, so has the company’s income from these assets. In 2013, the group reported a net profit of just £18.2m. City analysts are forecasting total income of £107m for the firm this year.

Greencoat went public intending to produce a steady income for its investors growing at a rate equal or above the rate of inflation over the long term. So far, it has accomplished this objective. The dividend has risen at an average annual rate of around 2% since 2014. At the time of writing, the stock supports a dividend yield of just under 5% and the payout is covered 1.3 times by earnings per share, so it looks as if it is fairly safe for the time being.

On top of this, because Greencoat has historically used placings to raise cash rather than borrowing, debt is relatively low at just 31% of assets on a net basis.

So overall, if you are looking for an income investment that is not threatened by climate change, and is helping to make the world a better place, then I recommend taking a closer look at these two renewable energy stocks.

The post Looking for renewable energy stocks? I’d consider these two income investments appeared first on The Twelfth Magpie.

More reading

• Are these the best UK shares to buy for passive income right now?
• 10% dividend yields! 3 dirt cheap stocks to consider in June?
• 10.1% and 9.8% dividend yields! Should I buy these cheap FTSE income stocks?
• These 3 shares could deliver a £1,840 second income in an ISA overnight!

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Greencoat UK Wind. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.