I firmly believe green energy is the future, and investment in this sector is only just getting started. As such, I’m on the lookout for renewable energy stocks to buy for my portfolio. Two companies really stand out to me right now as a great way to play the green revolution.
The best renewable energy stocks
In my opinion, there are two different types of green energy stocks available to investors today. There are those companies that already have an established businesses model, and firms that are more speculative. The latter could produce large returns for shareholders, but they could also lead to large losses. Many of these early-stage technologies are unproven, and investing in them is akin to gambling.
Still, I’m comfortable with that level of risk. That’s why I’d buy Ceres Power Holdings (LSE: CWR). The company is a world-leading developer of next-generation solid oxide fuel cell (SOFC) and electrochemical technology.
These fuel cells are relatively unique because they can use various fuels, including natural gas, hydrogen, and biofuel. I think this diversification reduces the risk of investing as it increases Ceres’ potential market size, although it does mean the business is not as green as some other renewable energy stocks.
The company also licences out its technology. While this model isn’t without its risks (customers could steal the group’s technology, for example), it may allow the business to grow faster by leveraging partners’ marketing experience and financial clout. It already has an impressive roster of clients. Bosch, US engine maker Cummins and Japanese carmakers Nissan and Honda are already working with the organisation.
That said, investing in small energy businesses is highly risky. There’s no guarantee the firm’s SOFCs will ever become mass-market products. If they fail to take off, the firm may be left nursing huge losses, placing significant stress on its balance sheet and potentially jeopardising its future. So, there is a chance the business may wipe out investors.
Nevertheless, I’m at ease with the level of risk involved here, which is why I’d add the business to my portfolio of renewable energy stocks.
Income from wind
Ceres is an early-stage business. One company with a more developed presence is Greencoat Wind (LSE: UKW).
Greencoat is one of the most established renewable energy stocks on the London market. Over the past few years, the company has acquired a portfolio of wind farms around the UK with the goal of generating a steady stream of income for investors.
So far, it has achieved this aim. The stock currently offers a dividend yield of 5% and has increased the payout gradually every year since 2014. I think this trend will continue.
Greencoat earns a profit by selling wind energy to utility providers. These sales are usually based on contracts, which can last for decades, giving the group some degree of visibility over its long-term cash flows.
Unfortunately, the income is not guaranteed. Any number of factors could hit profits from wind farms, including periods of low wind, higher costs, and removal of government subsidies. As more companies enter the market, the cost of wind energy may also fall further, reducing Greencoat’s profit margins.
Despite these risks, I’m optimistic about the group’s future. That’s why I would buy the shares for my portfolio of renewable energy stocks.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
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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.