My favourite UK renewable energy stock

British bank notes and coins

The renewable energy market is currently one of the fastest-growing sectors globally. Companies, institutional investors, governments and individual investors are pouring money into green energy holdings.

It doesn’t look as if this is gold rush will stop anytime soon. The world will require trillions of dollars of renewable energy spending over the next few years if it’s to reduce carbon emissions substantially. 

With this being the case, I’ve been scouring the market for decent renewable energy stocks.

Unfortunately, there are quite a few companies on the market I wouldn’t touch with a barge pole. Some are very experimental. Others are speculative. And some are at the mercy of government subsidies, which policymakers could eliminate at the drop of a hat.

Also, many others aren’t pure-play renewable energy businesses, which means they may still have some exposure to polluting industries. 

My top pick for renewable energy stocks

As such, my favourite UK renewable energy stock is SSE (LSE: SSE). I’ll admit this company isn’t a pure-play renewable energy enterprise.

As a utility provider, it has to have some exposure to carbon-intensive methods of energy generation to smooth out supply and demand patterns. The company also operates in a highly regulated industry.

Therefore, it has some of the risks I’d associate with companies that rely on government subsidies. If regulators decide to change their guidance for the firm, it could suffer losses and higher costs. 

Still, even after taking these risks into account, I’d buy the stock for my portfolio. And as it’s already an established business, the company is far from being a speculative investment. 

With a dividend yield of 5%, at the time of writing, the stock’s also an income champion. 

With its strong balance sheet and profit generation, SSE also has the financial firepower required to drive its transition to a renewable energy powerhouse. 

It already has a profitable renewables business. For the financial year to the end of May, the underlying operating profit at SSE’s renewables division rose from £567.3m to £731.8m. The firm also invested £294.3m in the division. 

The company plans to continue investing. It’s looking to deploy £7.5bn into green energy projects by 2030. While some of these projects will be supported by government subsidies, I think the firm is heading in the right direction overall.

Investing for the long run

Those are the reasons why I think SSE is one of the best renewable energy stocks in the UK to buy right now. The company’s already making money and returning cash to investors.

Further, it’s planning to grow its renewables business over the next decade. As the world transitions away from hydrocarbon energy towards a greener, cleaner future, I’d buy SSE for my portfolio to profit from this trend.

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Rupert Hargreaves 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.