5 high-efficiency renewable energy stocks

The risk of climate change has fueled long-term interest in renewable energy, including solar and wind power. Renewable energy is one of the important pathways to mitigating climate change. It is plentiful, comes from natural resources, and can be replaced faster than it is used up. Generates lower greenhouse gas emissions. This makes companies producing or using significant amounts of renewable energy an attractive place to start the investment hunt, while supporting the global transition to net zero emissions.

While renewable energy stocks can grow rapidly and be volatile, you can also find opportunities to earn above-average dividends. We’ve located five companies in the Morningstar North America Renewable Energy Index that offer attractive dividend yields and range from fairly valued to significantly undervalued. These are Avangrid AGR, Eversource Energy ES, Evergy EVRG, OGE Energy OGE and Gilead Sciences GILD.

Dividend and fair value

In short, dividend yield is the ratio of dividends paid by a company to its share price. The price/fair value ratio indicates whether a stock is trading above Morningstar’s estimated fair value. A ratio above 1.00 is considered overvalued and a ratio below 1.00 is considered undervalued.

Our methodology

For the purposes of this article, we looked at shares in the Morningstar North America Renewable Energy Index. We’ve filtered our stock holdings to only include US-based stocks and sorted them by yield, with the highest ones at the top.

The Morningstar North America Renewable Energy Index is designed to provide exposure to companies in the Morningstar Developed Markets Americas Index that derive at least 5% of their revenues from renewable energy. It also includes companies that use renewable energy to meet at least 25% of their energy needs, as measured by Sustainalytics’ Sustainability Engagement Metrics.

Avantgrid

Estimated fair value: $35.75

Morningstar Rating: 3 stars

Morningstar Uncertainty Rating: Average

Morningstar Capital Allocation Rating: Standard

Industry: Municipal services – regulated electricity

Avangrid’s renewable energy development subsidiary is one of the largest developers of renewable energy projects in the United States. It has more than 8.6 gigawatts of wind and solar energy across the United States.

In a recent report, Morningstar strategist Andrew Bischof said: “We anticipate Avangrid will install nearly 2 gigawatts of new renewable energy capacity over the next five years. The current capacity of the unit is approximately 26 gigawatts.”

Bischof also notes that Avangrid’s “diversified suite of utility services operate in supportive regulatory jurisdictions, reducing the risk of adverse rulings and supporting long-term earnings and dividend growth.”

Eversource Energy

Estimated fair value: $73

Morningstar Rating: 4 stars

Morningstar Uncertainty Rating: Low

Morningstar Capital Allocation Rating: Standard

Industry: Municipal services – regulated electricity

Eversource Energy is one of the largest utilities in the Northeastern United States after merging with NStar in 2012, acquiring Aquarion in 2017 and acquiring Columbia Gas in 2020.

In a recent report, Morningstar strategist Travis Miller writes: “We assume Eversource will invest $18 billion between 2024 and 2027 in its electric and gas utilities to help achieve regional clean energy goals and strengthen the grid. This should support a 6% increase in average annual earnings and dividends through at least 2026.”

Evergia

Estimated fair value: $65

Morningstar Rating: 4 stars

Morningstar Uncertainty Rating: Low

Capital Allocation Rating: Standard

Industry: Municipal services – regulated electricity

Everrgy was formed in June 2018 when Great Plains Energy of Kansas City, Missouri, and Westar Energy of Topeka, Kansas, merged. “With the integration complete and a new management team in place, Everrgy is working to improve historically challenging regulations and investing in clean energy,” writes Morningstar’s Miller.

Miller adds: “Since the merger, the board has increased the dividend by an average of 6% annually, including 7% in 2023. The board’s target payout ratio is 60% to 70% of operating profits, similar to most other regulated utilities. We forecast dividend growth of 6% for at least the next four years, in line with earnings growth.”

OGE energy

Estimated fair value: $38

Morningstar Rating: 3 stars

Morningstar Uncertainty Rating: Low

Morningstar Capital Allocation Rating: Standard

Industry: Municipal services – regulated electricity

OGE operates Oklahoma Gas & Electric and serves customers in Oklahoma and Arkansas.

In his report, Travis Miller writes, “OGE’s elimination of midstream energy exposure, along with improved regulation at Oklahoma’s major utility, puts it on track to generate more stable, growing earnings and dividends than it has in many years.”

Miller adds: “We forecast average annual weather-adjusted earnings growth of 6% for at least the next four years, consistent with management’s growth target. Most of the funding is based on the board’s plan to invest an average of $1.2 billion a year to expand and strengthen the electric grid. Industry-leading growth in electricity demand drives the need for this investment.

Teachings of Gilead

Estimated fair value: $97

Morningstar Rating: 5 stars

Morningstar Uncertainty Rating: Average

Capital Allocation Rating: Standard

Industry: Drug manufacturers – general

Gilead has committed to sourcing all the electricity used in its operations from renewable sources by 2025. From 2022, 62% of its global electricity demand is met from renewable sources, including on-site generation from solar panels. (The Morningstar Index on which this story is based also includes companies that use renewable energy intensively.)

“Gilead Sciences generates excellent profit margins with its HIV and hepatitis C virus portfolio, or HCV, which requires only a small sales force and low-cost manufacturing,” Karen Andersen, Morningstar strategist, writes in the report. Additionally, Andersen notes that “Gilead sells several single-pill HIV treatment regimens, and next-generation products with better long-term safety profiles, led by Biktarvy, are increasing the company’s market share.”