There is no doubt that we are currently in the midst of a climate crisis. This has been reinforced over the past few months, with extreme weather evident around the world. As countries strive for a zero-carbon future, renewable energy is therefore of ever-increasing importance. These are the two renewable energy stocks I’d buy to profit from this demand.
Investment into wind
The first renewable energy stock that I particularly like is Greencoat UK Wind (LSE: UKW). This company invests in wind farms, and currently has an extremely large portfolio across the UK. It has also managed to deliver strong returns to shareholders over the past few years, through both rises in its share price and a large dividend. I feel that these good shareholder returns can continue.
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Indeed, the firm’s recent half-year trading update was very strong, and its net cash generation was £103.6m. This compares to a figure of £71m last year. The company was also able to make a number of strategic acquisitions, helping to increase net generating capacity to 1,209MW. This is 36MW higher than at the end of 2020.
Further acquisitions are also expected to complete in the second half of 2021, and this should hopefully boost net generating capacity further. After raising £198m from a share placing in February this year, the company is also well-financed. Even so, financing is one of the main risks associated with the company, due to its tendency to raise money through issuing more shares. This leads to share dilution, and it decreases existing shareholders’ ownership percentage of the company.
Despite this, I still feel that this renewable energy stock is undervalued, as demonstrated by a price-to-earnings ratio of around 13. A dividend yield of over 5%, which is well-supported by earnings, is also a reason why I’m tempted to add this stock to my portfolio.
A 7% dividend yield renewable energy stock
As is clear from its name, NextEnergy Solar Fund (LSE: NESF) is focused on acquiring solar assets. As of the end of March, the company had 94 of these that were operational. Energy from these assets was also able to power around 195,000 homes in 2020.
In comparison to other renewable energy stocks, I also feel that NextEnergy Solar Fund represents very good value. In fact, it has a net asset value per share of 98.9p, while its share price is only 102.4p. This means that the company trades at a premium of just 3.5%, while the sector average for other renewable funds is a premium of 14%.
The company’s dividend has also continued to rise, and it currently totals 7.16p per share. This is equivalent to a yield of 7%, much higher than the large majority of other UK shares. With dividend cover of 1.1, it is also covered by earnings. Even so, there is always the risk that power prices will fall, and profits will be hit as a result. This would likely lead to a dividend cut. Despite this, I feel that the shares are still undervalued, and this is why they make up part of my portfolio.