How I’d use £1,000 to make passive income from renewable energy stocks

Renewable energy stocks are companies that operate in areas such as wind, solar and hydro. In short, any energy source that isn’t depleted when used. Given the impact of traditional fossil fuels on the planet, this area is growing as an investment choice across the board. Yet if I’m predominantly an income investor, can I make passive income from clean energy stocks?

Finding the relevant companies

The first thing I need to do is make a shortlist of relevant stocks. This involves looking through listed companies and specifically targeting stocks within the energy sector. For example, yesterday my colleague Edward Sheldon posted two of his favourite stocks from this area.

Something that’s worth noting when hunting for renewable energy stocks is that they don’t always come in a really obvious form. Some do, such as Renewables Infrastructure Group. This company owns a collection of wind and solar farms. Yet other companies might fit into this category due to the efforts being taken to utilise renewable energy. 

For example, National Grid is a utility company specialising in electricity and gas markets. Natural gas is a non-renewable resource. On top of this, the company has been in the news recently regarding leaked methane emissions. Yet the firm is making a push towards renewable energy. This is focused a lot on the US, with solar and onshore wind plants. So I could include this in my stock selection based on the future outlook.

Filtering for renewable energy dividend stocks

I need to make a larger shortlist of renewable energy stocks to begin with for my £1,000. This is because not all of the firms will pay out a dividend. So once I’ve got a list, I can go to my second step of looking at the dividend yield. This is the traditional way to evaluate the income that I’ll be receiving. It measures the dividend per share in relation to the share price. 

As a benchmark, I’d be looking to get a yield around the FTSE 100 average of 3.4%. Given that my £1,000 will be split across half a dozen stocks, I can pick individual yields both higher and lower than the average yield to blend together.

The two stocks above both currently offer me a generous yield, so that’s a good place to begin. National Grid has a yield of 5.25%, with Renewables Infrastructure Group on 5.2%.

What should I do if a renewable energy stock I like doesn’t pay out a dividend at the moment? I have a few options. If the dividend has simply been cut due to the pandemic, I could still buy the stock with the expectation of it being re-established shortly. Alternatively, if I really like the outlook for a stock that has no intention of paying out dividends, I could buy and hold it purely for the potential share price growth.

jonathansmith1 has no position in any share mentioned. The Motley Fool UK has recommended National Grid. 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.