When it comes to high dividend yields, the London Stock Exchange is filled with ample opportunities for income investors to capitalise on. And even after the FTSE 100 has been on the march for the last two years, there are still plenty of stocks trading at discounted valuations. That includes Greencoat UK Wind (LSE:UKW) whose share price is down almost 20% over the last 12 months.
This downward trajectory is far from pleasant for shareholders like myself. However, with the renewable energy trust still generating ample free cash flow, the dividends remain in place. As such, investors now have the opportunity to lock in a jaw-dropping 9% dividend yield!
The fall of renewables
The new-ish Labour government has outlined its goals to transition the British energy grid to reach net zero emissions by 2030. It’s an ambitious target that, by current estimates, will require a doubling of on-shore wind farms, a quadrupling of off-shore sites, and heavy investment in other renewable energy infrastructure as well.
That suggests there are a lot of growth opportunities for companies like Greencoat to capitalise on in the coming years. And yet renewable energy investment trusts seem to be in the gutter right now. Beyond Greencoat, other green stocks like Foresight Solar Fund, NextEnergy Solar Fund, and Renewables Infrastructure Group are all in the red over the last five years.
There are slightly different circumstances at each business. However, a leading theme that seems to be a massive turn-off for investors right now, is the level of leverage. Building out renewable energy infrastructure isn’t cheap. And with interest rates rising rapidly in recent years, the financial pressure of outstanding debts is mounting. Combining this with falling energy prices leads to an understandable concern among investors.
Worth the risk?
Despite appearances, Greencoat’s still generating sufficient cash flow to fund its dividend. Ignoring non-cash items (such as the change in value of wind assets on paper), the net cash generated from the group’s wind portfolio was £278.7m in 2024. Meanwhile, the total cost of dividends landed at £221.2m, indicating they are indeed still affordable even at a 9% yield.
The question income investors have to ask is whether this will continue to be the case moving forward.
From management’s perspective, Greencoat’s prospects continue to look good. The firm has announced its goal to return £1bn of capital to shareholders over the next five years while also improving dividend cover. And as a further sign of confidence, the company has launched a new £100m share buyback scheme to capitalise on its currently discounted share price.
Debt is a prominent weak spot for this enterprise. Yet, while the high leverage is unattractive, it has not yet reached the stage of being unmanageable. And with the amount of outstanding loans starting to shrink slowly, the group’s financial health appears to be on track to recover throughout 2025 and beyond. Of course, this is assuming interest rates don’t start rising again.
Overall, given the dirt cheap valuation and impressive yield, I think the risk’s worth taking. That’s why I plan on topping up my position once I have more capital at hand.
This post was originally published on Motley Fool
