This month, I have added a FTSE 250 share to my portfolio that has a whopping great dividend yield. Right now, in fact, that yield is 10.7%.
The yield was not the only reason I bought — after all, dividends are never guaranteed to last.
But the passive income potential was a large part of what swayed me to make this investment.
A proven business model but unpopular business area
What was this share, you may wonder? Greencoat UK Wind (LSE: UKW).
Greencoat UK Wind is an investment fund that, through a portfolio of renewable energy assets in Britain, aims to grow its dividend per share annually in line with the Retail Price Index, a leading measure of inflation.
Such an approach means that the dividend ought not to lose value over time in terms of real spending power.
The fund has steadily delivered on its dividend objective for the past 12 years in a row.
But it currently sells for a 27% discount to its net asset value. Its share price has fallen 13% over the past year, while the wider FTSE 250 index has moved up 8% during that time.
What’s going on?
I think Greencoat UK Wind, like some other FTSE 250 income shares in the renewable energy space, is suffering from investor concerns about what shifting trends in energy policy may mean for such funds.
If the demand for renewable energy wanes, there is a risk that the sort of assets Greencoat UK Wind has invested in could see their valuations drop. That helps explain the gap between the share price and net asset value.
Might the market be missing something?
I am not so bearish on this sector, though.
Greencoat sold £181m of assets last year, and those sales were in line with the net asset values on its books. That suggests that, while the stock market is discounting the fund’s asset value, the asset resale market is not.
Even partially closing the gap between the stated net asset value and share price could help boost the FTSE 250 share considerably.
Meanwhile, those juicy dividends keep coming.
Will they last? The risk of higher interest costs could eat into profitability, as the fund needs to service its debt.
But Greencoat UK Wind remains strongly cash generative, it plans to sell more assets and cut debt, and share buybacks could also help boost its value as the company can currently buy and cancel shares for well below their net asset value. That ought to boost the net asset value per share of the outstanding shares.
Greencoat UK Wind is among multiple renewable energy shares that have been marked down substantially in recent years. Clearly investors are nervous about changing priorities in UK energy policy and what that might mean for businesses focussed on wind and solar power.
But I like the ongoing dividend prospects. Even without further growth in dividend per share (which I expect, in line with the fund’s policy), a yield north of 10% is highly attractive to me when I think the payout can be sustained. Here, I am optimistic it can.
