You probably don’t need me to tell you that renewable energy is a hot space right now. In fact, decarbonisation and climate change should make this a key investment theme of the next decade and beyond.
With this in mind, here’s how I’d invest in renewable energy stocks today if I had a sizeable sum like £10,000.
Renewable energy stocks to buy
Perhaps the first thing to understand when screening for potential renewable energy stocks to buy is just how broad this sector is. With a few mouse clicks, I can buy shares in companies specialising in fuel cells (Ceres Power Holdings), integrated hydrogen energy solutions (ITM Power) and waste-to-energy technology (Powerhouse Energy). All are potentially very exciting. Unfortunately, they aren’t making profits just yet.
If the thought of buying an unprofitable company didn’t appeal to me, a FTSE 100 chugger like SSE might be worth a look. In fact, I might be inclined to prioritise this utility stock if securing a dividend yield were also a priority.
As things stand, analysts have the company returning 83.2p per share to investors in the current year. That’s a chunky yield of 5.7% at today’s share price. Naturally, huge share price growth is unlikely. Even so, the company ticks the renewables box. It plans to triple green energy production within this decade.
Safety in numbers?
Unfortunately, the issue with selecting individual renewable energy stocks right now is we don’t know exactly how things will pan out. As the tech sector’s shown, many of the big players a couple of decades ago are no longer around. That’s potentially problematic for long-term investors like me.
As holders of the aforementioned Powerhouse Energy will no doubt attest, there’s also the potential for some company share prices to ‘pop and drop’. In just a couple of weeks last December, PHE shares enjoyed a spectacular gain of around 250%! Since then however, the valuation has tumbled by two-thirds.
One way around this would be to invest the majority of my £10,000 (say 70%, or so) in actively managed funds. Doing this may impact my eventual returns (ongoing fees will need to be paid) but capital risk would be reduced too.
Gresham House Energy Storage Fund is one option I like. Since supply and demand for energy can vary from day to day, this fund invests in battery storage systems. Like SSE, this looks a decent option for me if generating income were important.
FTSE 250 member Renewables Infrastructure Trust is another example. It has holdings in onshore and offshore wind power projects and solar farms across the UK, Ireland, France, Germany, and Sweden. This makes it a nicely diversified pick, in my opinion.
Investing in renewable energy stocks using a balanced approach like those described above feels appropriate for me. However, there’s still no guarantee this entire sector won’t be volatile going forward. A stumbling economic recovery, for example, could push investors to move into more defensive sectors. This means I could be stuck with paper losses for a while.
So, while I remain very bullish on renewable energy stocks, I think it would be important for me to have a healthy amount of money in other, unrelated companies and potentially lucrative themes elsewhere in my portfolio.
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Paul Summers 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.