Renewable energy stocks have had a good year. But many of the biggest winners are early-stage companies with minimal profits. In my view, current valuations leave little room for error.
I’d like more exposure to renewables, but I’m not keen on investing in companies already priced for perfection. I’ve been hunting through the UK market for renewable stocks with growth potential and affordable price tags. Here’s what I’ve found.
Biggest and still the best?
FTSE 100 utility group SSE (LSE: SSE) is already one of the UK’s largest generators of renewable energy. Over the last year or so this focus has been strengthened. The group’s consumer business has been spun out and some of its older fossil-fuel power stations are being shut down.
By 2030, SSE aims to triple its renewable energy output and cut the carbon content of its electricity by 60%. SSE recently took a big step towards this goal recently, when it closed a deal to build the world’s largest offshore wind farm with Norwegian group Equinor.
The Dogger Bank Wind Farm will take until 2026 to complete, when it will have a capacity of 3,600MW. That’s enough renewable electricity to meet 5% of UK demand.
SSE shares have lagged the market in recent years, but I think things are looking up. The stock’s 5.8% dividend yield looks secure to me and I think the SSE shares could perform well from current levels. This is one renewable energy stock I’d be happy to buy.
My next pick is industrial group Johnson Matthey (LSE: JMAT). This industrial group makes most of its money today from producing catalytic converters for cars and trucks. I admit this isn’t exactly renewable energy.
However, Johnson Matthey has been in business for over 200 years. The group’s management has seen the writing on the wall for fossil fuels and is moving into new areas, including battery technology and hydrogen fuel cells.
Johnson Matthey also has a growing healthcare business. While this isn’t renewable energy, I think it does fit into the broader category of businesses that improve our lives and the environment.
This business has evolved and adapted to technical change many times over the years. But the JMAT share price has plunged this year. In my view, the stock looks cheap at current levels. JMAT stock is on my shortlist of shares to buy for my own portfolio.
The best renewable energy stock?
The Renewables Infrastructure Group (LSE: TRIG) isn’t exactly a household name. This investment trust owns stakes in renewable energy projects in the UK and Europe. It does nothing else.
This focused model has enabled TRIG to outperform utility rival SSE in recent years. Whereas SSE’s share price is more or less unchanged from five years ago, TRIG is up nearly 30%.
Alongside this, TRIG shareholders have enjoyed a reliable, growing stream of dividends. According to TRIG’s latest results, the trust has 65% of its assets in onshore wind, 21% in offshore wind and the remainder in solar. Battery power is the newest addition to the portfolio, but currently only accounts for 1% of its asset value.
I’ve followed this stock for several years and have been impressed by its consistent performance and good quality shareholder communication. The shares aren’t as cheap as they were, but still offer an attractive 5.4% dividend yield.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has 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.