There are a few areas of the UK stock market that aren’t getting a lot of love from investors this year. One of them is the renewable energy sector, which has faced headwinds from falling energy prices and a windfall tax.
But for investors searching for decent levels of passive income, that could be good news, as there are currently some juicy yields on offer.
Here, I’m going to outline why I’d invest in Greencoat UK Wind (LSE: UKW) to aim for £1,000 a year in passive income.
Wind farm specialist
Greencoat UK Wind is a FTSE 250 investment trust that operates 46 onshore and offshore wind farms across the UK.
It is only invested in assets that are already producing income. And these have a generating capacity of 1,652 megawatts, which is enough to power over a million homes.
What I like here is that the company’s revenue comes from both the sale of power produced and green subsidies. It signs long-term agreements with utilities that are legally obliged to procure a certain percentage of power from renewable energy sources.
For example, the company recently acquired the 42-megawatt Dalquhandy wind farm in Scotland for approximately £50m. This site benefits from a 10-year fixed price PPA (power purchase agreement) with BT for 80% of its output.
Inflation-linked dividend
Greencoat’s policy aims to increase the dividend in line with retail price index (RPI) inflation while reinvesting excess cashflow to purchase additional wind farms.
So far the trust has managed to keep up with consumer inflation since launching in 2013. However, if the cost of living remains high, this could limit the company’s ability to grow its portfolio through acquisitions.
Meanwhile, the UK windfall tax established in response to last year’s higher energy prices will also impact profits this year. So there are headwinds to bear in mind here.
Passive income generation
The trust is expected to pay a dividend of 8.77p per share in 2023. That would be a 13.4% year-on-year increase in line with December 2022 RPI inflation.
This gives the stock an attractive forward-looking dividend yield of 6.2%, which is significantly higher than the FTSE 250 average (3.4%).
It means I’d need approximately 11,400 shares to generate £1,000 a year in passive income. Those would set me back around £16,000 at today’s share price of 140p.
Of course, no dividend is ever guaranteed, so I’d only make this part of a well-diversified portfolio.
Policy tailwinds
The company estimates that the total value of UK wind assets in operation, under construction or agreed to is around £100bn. And the benefits are obvious, as wind energy is green, inexhaustible and reduces the need to rely on imports.
This last point is important, as last year proved how geopolitical events can quickly cause chaos in global energy markets. As a result, increasing the domestic supply of clean energy has become a major political issue.
Indeed, opposition leader Sir Keir Starmer has vowed to “throw everything” towards achieving net zero if Labour wins the next election. He said this will specifically involve building many more onshore wind farms.
With the stock down 8% year to date, I’m in the process of building a position.
