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My 3-step plan for buying the best renewable energy stocks

Windmills for electric power production.
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Renewable energy is one of the main themes that I think will drive the stock market forward in the years to come. It’s an area that’s seeing hundreds of billions of pounds being pumped into it globally. This is coming from governments and corporates alike in order to hit various net-zero goals that have been pledged. Lots of firms are becoming greener, so what are the best renewable energy stocks to buy?

Honing in on a broad industry

The first thing I’d do when looking for renewable energy stocks is to decide which area to focus on. Renewable and green energy is a large area, encompassing different things. These include wind, solar, hydro and tidal energy sources. 

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I also need to decide whether I want to invest in a stock that’s directly involved in the exploration and provision of renewable energy. Or I could decide to buy stocks that are indirectly linked to this area, such as via manufacturing parts of solar or wind plants.

There’s no right or wrong answer, and it really depends on which part of the sector I’m most interested in.

Making financial sense

The second step would be to look at the financials of the companies. It’s one thing liking what the business does, quite another to label it one of the best renewable energy stocks to buy.

For example, in the utility space, a few large players are dominant. These incumbents are already investing billions into clean energy sources. Therefore, it’ll be hard for a new company to come into this particular segment and take a large chunk of the market in the short term.

Even if the stock I like operates in a more indirect way in the sector, it still needs to have appropriate profit margins, debt levels and other points that make a company financially sound. 

Getting a mix of the best renewable energy stocks

My final point is that I need to ensure the stocks I buy are well diversified. The industry is still growing. I don’t think any of us quite know what the energy sector will look like in a decade. So I don’t want to put all my eggs into one basket by selecting only one or two of the best renewable energy stocks right now.

I do want to focus on the area I’m keenest on (as my first point explains). Yet even within that, it’s good to hold a variety of stocks. One way I can do this is by picking companies from around the world. Buying shares from the US as well as the UK allows me to achieve diversification even within the same sector.

Overall, there aren’t just one or two stocks that I can label the best renewable energy plays right now. On the other hand, the industry is too broad to invest in everything. Getting a diversified balance of financially sound firms is my best bet to build a solid portfolio in this space, I feel.

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jonathansmith1 and The Motley Fool UK have 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.

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