One trend that has accelerated in recent years is the focus on using environmental, social and governance (ESG) factors to make investment decisions. Many investors are now using 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. This is more than double the $285 billion that was poured into these funds in 2019. Net assets totaled just over $18 billion last year but could reach as high as $34 billion by 2026 and make up more than one-fifth of total assets.
Clearly, ESG investing isn’t just the latest investment fad but a trend that should grow at a high rate in the near term. Investors can profit from ESG dividend stocks is by focusing on those companies that are more environmentally friendly. This includes those companies that are increasing their renewable energy footprint, which should not only help the environment but also enable companies to grow their dividends.
Three of our favorite renewable energy dividend stocks include:
Atlantica Sustainable (AY)
The first utility name to consider is U.K.-based Atlantica Sustainable (NASDAQ:AY), a sustainable infrastructure company. Atlantica Sustainable has a wide footprint, with operations in North America; South America; and Europe, the Middle East and Africa (EMEA). The EMEA region makes up nearly half of revenue so far in 2022, with North America the next largest market. The company is valued at $3.1 billion and the generates annual revenue of just over $1 billion.
Atlantica Sustainable is highly focused on investing and operating renewable energy assets in an effort to become one of the top names in sustainable energy. The company has 41 assets, which include renewable energy sources as well as transmission and transport, efficient natural gas and water projects.
In total, Atlantica Sustainable’s assets have 2,121 megawatt (MW) of aggregate renewable energy installed generation capacity, 343 MW of efficient natural gas power generation capacity, and 55 megawatt thermal (MWt) district heating capacity. The company also has more than 1,200 miles of electric transmission lines and has the capacity to desalinate 17.5 million cubic feet per day.
The company does have a natural gas business, so Atlantica Sustainable isn’t exactly a pure play on renewable energy. That said, renewable energy contributes more than three-quarters of annual revenue, making these assets the largest business within the company. Efficient gas and heat and transmission lines each contribute slightly more than 10% of revenue, with water the remainder.
The company’s assets usually have agreements in place for revenue, with more than half of contracts linked to inflation or indexed to a fixed number of rate escalations over time. Therefore, Atlantica Sustainable is less susceptible to the impact of inflation than its peer group. The company also has a weighted average contract life of 15 years, giving Atlantica Sustainable a somewhat predictable picture of where revenue will come from over the long term.
Atlantica Sustainable has enjoyed a solid 2022. Through the end of the third-quarter, gigawatt hours (GWh) produced by renewable energy assets has increased 20% to 4,155 and by 14% for efficient natural gas and heat. Transmission lines in operation are higher by 5.4% to 1,229 miles. Operating cash flow is higher by almost 17%. With such strong results, we believe that the stock’s 6.5% yield is safe and that the seven-year dividend growth streak is very likely to continue.
NextEra Energy (NEE)
Our next pick for renewable energy is NextEra Energy (NYSE:NEE), an electric 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 in excess of $17 billion.
The first two segments are rate-regulated electric utilities that have nearly 6 million customer accounts covering more than 11 million residents. These businesses are more typical in that they have more predictable revenue and earnings. They are also reliant on regulatory approval for rate increases. Florida Power & Light and Gulf Power make up more than two-thirds of revenue.
NextEra Energy Resources contributes the remainder of revenue. This business is focused on wind and solar energy. NextEra Energy is the largest generator of energy from wind and sun in the world. In addition, the company is the no. 1 name in battery storage.
NextEra Energy Resources has 64 GW of generating capacity in operation and continues to expand aggressively. As of the most recent quarter, NextEra Energy had 2,345 MW of new renewable and storage origination. Management believes that this trend will continue as it projects a total origination of 27,700 to 36,900 MW between 2022 and 2025. The company’s backlog stood at 20,000 MW as of the end of the third quarter.
Looking long term, management believes that there is immense opportunity for the company to take advantage of decarbonization. In the U.S. alone, NextEra Energy believes that the drive to reduce emissions and lower customer bills is a $2 trillion market. As the largest provider of renewable energy in the world, this has NextEra Energy well positioned to tap into what should be a major market.
Shares of the company yield just 2%, much lower than the typical utility stock. However, NextEra Energy has a much larger runway for growth given the size of its renewable business. With a dividend growth streak of 26 years, NextEra Energy is one of just three utility companies in the Dividend Aristocrat index.
Ormat Technologies (ORA)
Our final renewable pick is Ormat Technologies (NYSE:ORA), which provides geothermal and recovered energy power and products to customers. In addition to power generation and storage, the company also markets equipment to others in the renewable energy business. Ormat Technologies has operations in nearly a dozen countries, including the U.S., Turkey, New Zealand and Indonesia. The company is valued at $5.6 billion. It produced revenue of $582 million in 2021.
The majority of the company’s MW are located in the U.S. However, the remainder of its operations are closely distributed among the countries that Ormat Technologies operate in. The company is also pursuing growth opportunities throughout its portfolio. For example, Ormat Technologies signed agreements totaling $137.1 million in its most recent quarter. This is a 150% increase from the prior period.
It’s not just the U.S. that is experiencing increased demand. Much of the additional backlog in the quarter comes from a $100 million agreement 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 has also seen a 6.6% increase in generation to 1,624 GW hours. Ormat Technologies expects to add another 100 to 110 MW by the end of next year.
The company forecast that it will be able to significantly increase it geothermal and solar capacity by the end of 2023 and become one of the leading names in the U.S. storage sector. By the end of next year, Ormat Technologies estimates that it can increase geothermal and solar energy production by 18%. Energy storage will likely to be up three times what it was in 2021.
Shares of Ormat Technologies have increased 27% over the year. This has caused the dividend yield to fall 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 last decade, most recently in 2018.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.