Unlocking lifelong passive income with dividend shares requires a certain type of business. There are plenty of income-producing enterprises on the London Stock Exchange today. But whether or not they will continue to be in around 50 or 60 years from now is a big question mark.
In my experience, the companies offering an irreplaceable critical product or service are usually the last to become disrupted. This is especially true for firms inside regulated industries with high barriers to entry, such as energy. And that’s why Greencoat UK Wind (LSE:UKW) is near the top of my long-term buy list right now.
Reliable dividend shares?
The British energy sector is in the middle of a transition to move away from fossil fuels and into renewables. While the UK still generates the bulk of electricity from gas turbines, renewable infrastructure is expanding yearly. And in the last 12 months, 35.7% came from green energy sources, 29.9% being wind power.
Britain is home to some of the largest wind farms in the world. And it’s created ample opportunities for Greencoat to expand its portfolio. The firm invests in both on- and off-shore wind assets, selling clean energy to companies such as Centrica, SSE, and RWE.
With the electrification of technology now extending to the automotive sector through electric vehicles (EVs), demand for clean energy is rising rapidly. This trend is only being accelerated as the impact of global warming becomes increasingly clear on the planet’s climate.
And while wind energy isn’t the only solution, experts predict it will play a critical role in energy infrastructure for decades to come.
In other words, demand for the firm’s product is set to rise considerably and isn’t likely to disappear anytime soon. And since renewable energy infrastructure is capital-intensive, natural barriers to entry surround the industry.
Those are the exact traits I look for when hunting dividend shares that can potentially generate reliable income in the long run.
Building a triple-digit second income
Generating an extra £100 a year isn’t going to change someone’s life. But by reinvesting this income and letting compounding do its magic, it can grow into something far more substantial.
Today, these dividend shares offer a yield of 5.7% at a stock price of 146p. Therefore, to generate £100 of passive income, investors would need to invest roughly £1,750 into this stock.
That translates into around 1,200 shares. And if left to compound for 40 years at this rate of return, investors could end up with roughly 10 times as much, both in terms of capital and passive income. And that’s not including any gains from a rising stock price.
There are always risks
Shareholder payouts are funded from profits. And while REITs like Greencoat are legally required to payout 90% of their net income if earnings suffer, so will the investor’s income stream. In fact, with so much capital being extracted from the business each year, Greencoat is highly dependent on external financing to expand its asset portfolio.
Now that interest rates are rising, future growth could be more challenging. And if electricity becomes too cheap, the group may struggle to service its existing loans.
Nevertheless, the group’s long track record gives me confidence in the long-term sustainability of dividends. That’s why this company is already in my income portfolio.
