A trend that has accelerated in recent years is the emphasis on the use of environmental, social and governance (ESG) factors for making investment decisions. Many investors now use a company’s performance on these ESG pillars to make their investment decisions.
In 2021, the number of inflows into ESG-focused funds worldwide was estimated at $596.2 billion. That’s more than double the $285 billion that poured into these funds in 2019. Net assets totaled just over $18 billion last year, but could reach $34 billion by 2026. and represent more than one-fifth of total assets.
Clearly, ESG investing is not just the latest investing fad, but a trend that is expected to grow at a high rate in the near term. Investors can take advantage of ESG dividend stocks by focusing on the most environmentally friendly companies. This includes companies increasing their renewable energy footprint, which should not only help the environment, but also allow companies to increase their dividends.
Three of our favorite renewable energy dividend stocks include:
Atlantica Sustainable (AY)
The first public service name to consider is based in the UK Sustainable Atlantica (NASDAQ:AY), a sustainable infrastructure company. Atlantica Sustainable has a large footprint, with operations in North America; South America; and Europe, Middle East and Africa (EMEA). EMEA accounts for nearly half of revenue so far in 2022, with North America being the second largest market. The company is valued at $3.1 billion and generates annual revenue of just over $1 billion.
Atlantica Sustainable has a strong focus on investing in and operating renewable energy assets with the goal of becoming one of the leading names in sustainable energy. The company has 41 assets, which include renewable energy sources as well as transmission and transportation, efficient natural gas and water projects.
In total, Atlantica Sustainable’s assets have a total installed renewable energy generation capacity of 2,121 megawatts (MW), 343 MW of effective natural gas-fired electricity generation capacity and thermal district heating capacity (MWt ) of 55 megawatts. The company also owns more than 1,200 miles of power transmission lines and has the capacity to desalinate 17.5 million cubic feet per day.
The company has a natural gas business, so Atlantica Sustainable isn’t exactly a pure play on renewables. That said, renewables contribute more than three-quarters of annual revenue, making these assets the company’s biggest business. Efficient gas and heat and transmission lines each contribute just over 10% of revenue, water the rest.
Business assets typically have agreements in place for earnings, with more than half of the contracts linked to inflation or pegged to a fixed number of rate increases over time. Consequently, Atlantica Sustainable is less sensitive to the impact of inflation than its peer group. The company also has a weighted average contract life of 15 years, which gives Atlantica Sustainable a somewhat predictable picture of where long-term revenue will come from.
Atlantica Sustainable had a strong year in 2022. Through the end of the third quarter, gigawatt hours (GWh) produced by renewable energy assets increased by 20% to 4,155 and by 14% for natural gas and effective heat. Transmission lines in service are 5.4% higher at 1,229 miles. Operating cash flow is nearly 17% higher. With such strong results, we think the stock’s 6.5% yield is safe and the seven-year dividend growth streak is very likely to continue.
NextEra Energy (NEE)
Our next pick for renewable energy is NextEra Energy (NYSE:BORN), an electrical utility company based primarily in Florida. The Company consists of three segments, including Florida Power & Light, Gulf Power and NextEra Energy Resources. The $167 billion company has annual revenue of more than $17 billion.
The first two segments are price-regulated electricity utilities with nearly 6 million customer accounts covering more than 11 million inhabitants. These businesses are more typical in that they have more predictable revenues and profits. They are also dependent on regulatory approval for rate increases. Florida Power & Light and Gulf Power represent more than two-thirds of sales.
NextEra Energy Resources contributes the remainder of the revenue. This activity is centered on wind and solar energy. NextEra Energy is the largest producer of wind and solar energy in the world. Moreover, the company is the no. 1 name in battery storage.
NextEra Energy Resources has 64 GW of production capacity in operation and continues to expand aggressively. As of the last quarter, NextEra Energy had 2,345 MW of new renewable energy sources and storage. Management expects this trend to continue as it forecasts total generation of 27,700 to 36,900 MW between 2022 and 2025. The company’s backlog stood at 20,000 MW at the end of the third quarter.
In the long term, management believes there is a huge opportunity for the company to take advantage of decarbonization. In the United States alone, NextEra Energy estimates that the drive to reduce emissions and lower customer bills is a $2 trillion market. As the world’s largest renewable energy provider, NextEra Energy is well positioned to tap into what is expected to be a major market.
The company’s stock returns just 2%, far less than typical utility stocks. However, NextEra Energy has a much broader growth avenue given the size of its renewables business. With a 26-year dividend growth streak, NextEra Energy is one of only three utility companies in the Dividend Aristocrat Index.
Ormat Technologies (ORA)
Our final renewable pick is Ormat Technologies (NYSE:ORA), which provides customers with geothermal and recovered energy and products. In addition to power generation and storage, the company also markets equipment to others in the renewable energy sector. Ormat Technologies is present in nearly a dozen countries, including the United States, Turkey, New Zealand and Indonesia. The company is valued at $5.6 billion. It generated $582 million in revenue in 2021.
The majority of the Company’s MWs are located in the United States. However, the rest of its operations are tightly distributed among the countries in which Ormat Technologies operates. The company is also looking for growth opportunities across its portfolio. For example, Ormat Technologies signed deals totaling $137.1 million in its most recent quarter. This is a 150% increase over the previous period.
It’s not just the United States that is seeing increased demand. Much of the additional backlog in the quarter came from a $100 million deal with New Zealand and Indonesia.
So far in 2022, Ormat Technologies has added 73 MW to its global portfolio, bringing the total to 1,085 MW. The company also recorded a 6.6% increase in production to 1,624 GW hours. Ormat Technologies plans to add another 100 to 110 MW by the end of next year.
The company predicts that it will be able to significantly increase its geothermal and solar capacity by the end of 2023 and become one of the leading names in the storage industry in the United States. By the end of next year, Ormat Technologies estimates it can increase geothermal and solar energy production by 18%. Energy storage will likely be three times what it was in 2021.
Ormat Technologies shares rose 27% for the year. This caused the dividend yield to drop to just 0.5%. The company’s dividend growth history is more uneven than our other renewable energy picks, as the dividend has been cut several times over the past decade, most recently in 2018.
As of the date of publication, Bob Ciura held (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.