My top UK renewable energy stocks

Renewable energy stocks still have a lot of potential to deliver returns for shareholders and here are two Andy Ross likes the look of.

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Windmills for electric power production.

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Renewable energy stocks are very much in vogue. That’s not surprising given the publicity around climate change and big environment-focused events such as COP26. That international summit is due to take place in November 2021. It should really shine a spotlight on renewables and may lead to new international agreements.

Making money from wind

Greencoat UK Wind (LSE: UKW) is a renewable energy stock I’d be tempted to add to my portfolio. The FTSE 250-listed fund is well run and specialises in renewable energy investment.

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Greencoat earns a profit by selling wind energy to utility providers. These sales are usually based on long-term contracts, which gives the group visibility over long-term cash flow.

Another good thing about Greencoat is that its premium has come down a lot, meaning buying the shares now is much cheaper, compared to the net asset value, than it was 12 months ago. The premium now is around 6%, compared to highs of over 20% seen just within the last year.

On top of being better value now, compared to recent history, the shares also provide a good level of income. The dividend yield is 5.4%. That’s far more than the average for the FTSE 250, which is around 1.75%.

The downside of this is that competition could increase or Greencoat could lose key members of its investment team. Assets could also become too expensive to acquire profitably. Overall though, I back Greencoat UK Wind to perform well for many years to come.

A renewable energy stock with a difference

Gore Street Energy Storage Fund (LSE: GSF) targets a 7% yield, making it a great income stock. It’s an early leader in investing in energy storage assets, which will be needed as renewables start to dominate energy production.

Storage is needed because renewable energies such as solar and wind can be unpredictable, which presents a considerable challenge for the energy market. Energy storage is one solution.

The investment trust owns and operates a selection of energy storage facilities, primarily batteries. It manages these facilities with the goal of producing a steady income to fund a regular dividend payout. At the time of writing, the stock offers a yield of around 6.7%.

The fund is looking to expand beyond the UK and Ireland and into the US and Western Europe, so there’s potential for it to become significantly larger in the future. This could put it on the radar of more investors, increase demand for the shares and consequently push up the share price. This is why I’m tempted to invest now, as the energy market is still in the relatively early phases of a shift to renewable energy.

Let’s be very clear – there are risks involved with investing in UK renewable energy stocks because the shares tend to be expensive compared to the net asset value. However, I believe the sector should continue to attract a lot of investor money, with the implication that shares should do well, even from their current relative highs.

That’s why I’d be tempted to add UK renewable energy stocks to my portfolio. They can provide both income and growth, which I think is a great combination.

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Andy Ross 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.

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