Reviewing Attractive Clean Energy Income Assets

Not a day goes by where investors don’t find new articles addressing green energy in their email inboxes.

The global and domestic narrative over enhancing the transition to green energy usage is embedded in local, state, federal and international agendas, laws and regulations that aim for a net-zero-carbon-emissions world by 2050.

There is reason to be optimistic about reaching such a lofty goal, as there is no shortage of capital pouring into the green space toward this endeavor.

Total investment in renewable-energy projects, electric vehicles and other green efforts exceeded $520 billion last year to set a record, according to “Bloomberg New Energy Finance,” which tracks green investments. Spending was up 12% from a year earlier and nearly 60% from 2015, Bloomberg data show.

The Wall Street Journal reported this past weekend, “As recently as 2014, the world’s energy companies spent $735 billion on oil-and-gas extraction. The figure was less than half that last year, while spending on wind and solar projects rose to nearly $220 billion, up from about $135 billion six years earlier, according to Rystad Energy, a consulting firm. Some analysts predict spending on renewable energy will exceed oil and gas in the next several years.”

The Wall Street Journal article goes on to state that consulting firm “Wood Mackenzie has estimated that at least $50 trillion in investment will be needed to reduce fossil-fuel and other greenhouse-gas emissions by 2050 to meet the goals of the Paris climate accord. Roughly half of that money, the firm said, needs to go to areas such as wind and solar power and battery storage. Another $18 trillion is needed to modernize the electric grid, in part to transition to cleaner energies such as solar and wind.”

“Assets in investment funds focused partly on the environment reached almost $2 trillion globally in the first quarter, more than tripling in three years. Investors are putting $3 billion a day into these funds. More than $5 billion worth of bonds and loans designed to fund green initiatives are now issued every day. The two biggest U.S. banks pledged $4 trillion in climate-oriented financing over the next decade.”

With the mighty tailwinds of capital being deployed by Wall Street, global institutional investors, retail investors, President Biden’s proposals and those around the world by governments in a race to see who can save the planet from itself fast enough, it begs the obvious questions for income investors as to who the biggest publicly listed winners are going to be and whether there are green energy plays that pay juicy yields.

This is a quandary, because the Environmental, Social, and Corporate Governance (ESG) movement is still relatively young in terms of its scaling up, and almost all assets dedicated to ESG energy projects are purely organic growth investments in nature. Finding yield with good risk/reward profiles is a challenge. Yet, there are some places for yield-hungry investors.

One place would be the electric utilities sector of the market. Historically, the power utility stocks underperform during periods of inflation as capital rotates into more cyclical sectors of the market that are more leveraged to inflationary forces and upward pricing pressures. But this time around is different. The multi-trillion-dollar transformation to green and renewable energy will, in my view, have an insulating effect on how utility stocks trade going forward, resulting from upward revisions in rates of growth.

Even with bond yields ticking higher, America and the rest of the developed and emerging market economies are fast moving to transition from fossil fuels to renewable sources of energy. These companies are on the receiving end of current and future massive capital inflows, and it raises questions about why these stocks are trading near or at new all-time highs amid the rising amplitude of inflation rhetoric.

Consider the fact that for every new and additional electric vehicle (EV) car, truck, delivery van, 18-wheeler, motorcycle, scooter and skateboard that hits the streets, the need for electricity to charge and recharge will skyrocket for many years to come. And this is just the transportation subsector. Smart homes, smart cities and over 3 billion devices being connected by the internet of things (IoT) in the next three years will also cause the demand for electricity to surge.

Therefore, it stands to reason that those utilities that dominate the electric grids will benefit immensely in terms of both revenue and profit growth while generating attractive and growing dividend payments. Renewable energy means recurring revenues without the cost and fluctuating prices of fossil fuel inputs. Once solar, wind, hydro, thermal and biomass infrastructure is built and operating, it will become a cash flow machine.

A one-year chart of the Dow Jones Utility Average Index below shows a sector that has recently pulled back off its recent highs, along with many sectors of the market, where an attractive entry point has presented itself. The top two utilities exchange-traded funds (ETFs) are the Utilities Select Sector SPDR Fund (XLU), which sports a current yield of 3.00%, and the Vanguard Utilities ETF (VPU), which offers a current dividend yield of 3.07%.

Stodgy coal, oil and natural gas burning companies with low single-digit-percentage growth rates are becoming tomorrow’s greener power companies that will be generating wider profit margins as renewable assets become paid for and represent a much bigger percentage of revenue. Natural gas will still play a major role in power generation which coincides with the push for renewables.

Natural gas is clean, cheap and incredibly abundant within the United States, making the long-term transition to renewables alongside the high utilization rate of natural gas a harmonious path to meet long-term goals without major disruptions like what occurred in Texas this past winter. That ugly situation showed exactly what can, and will, go wrong if energy policy is not a balanced approach.

To that end, there are also a handful of non-master-limited partnership (MLP) gas pipeline stocks that pay 1099 dividends with yields of 5-7% — Kinder Morgan Inc. (KMI), ONEOK Inc. (OKE) and Williams Companies (WMB). There are also pipeline exchange-traded funds (ETFs) utilizing some leverage that pay 8-9% in 1099 dividends as well. They are Alerian MLP ETF (AMLP), Virtus InfraCap MLP ETF (AMZA) and Global X MLP ETF (MLPA).