As income investors, we want to try to get the most bang for our buck. Put another way, we’re looking for high-yield income stocks. However, it’s important to distinguish between very risky stocks and others that pay more sustainable dividends. So what’s the verdict on the one I’ve spotted?
It’s always sunny
I’m talking about the Bluefield Solar Income Fund (LSE:BSIF). Over the past year, the stock is down 17%, with a current dividend yield of 11.5%. Before we get into dividend specifics, it’s important to understand the company’s basics.
It’s an investment trust that owns large-scale renewable energy assets across the UK, primarily solar farms. It also has smaller exposure to wind and battery storage projects. The company’s portfolio now includes more than 200 renewable assets generating hundreds of megawatts of electricity.
The business model is relatively straightforward. Bluefield generates electricity from its solar farms and sells that power into the UK energy market. A large portion of revenues also comes from government-backed subsidy schemes tied to renewable generation. These contracts help provide predictable, inflation-linked cash flows over many years. Which leads me nicely on to the dividend!
The dividend
Unlike cyclical businesses that depend heavily on consumer spending or commodity prices, solar infrastructure generates recurring income from long-life assets. The board recently reaffirmed a dividend target of at least 9p per share annually, and management expects this to be covered by earnings. At the moment, the dividend cover ratio is 1, so currently this commitment stacks up.
To put the 9p in perspective, five years ago this was 8p, so we’ve seen a steady tick higher in the dividend per share payment over the years, which is another green flag for sustainability.
From a fundamental perspective, solar farms are relatively low-maintenance assets once operational. After the upfront construction costs, ongoing operating expenses are comparatively modest. That creates strong cash conversion, which is precisely what income investors want to see.
Still some risks
Of course, no stock with a yield above 10% is going to be super low risk. One of the biggest issues I see going forward is the prospect of higher interest rates. The energy shock and inflationary problems are likely to push the Bank of England committee to raise interest rates. Given that the company takes on debt as part of new projects, this will raise the borrowing costs and push down potential profits.
Power prices are another risk. Although subsidies provide some protection, weaker electricity prices can still pressure revenues and reduce portfolio valuations.
When I balance everything out, I don’t believe the yield on Bluefield Solar is too good to be true. However, I accept that it’s a higher-risk play than some other stocks with a lower yield. On that basis, I’m considering buying the stock, but only a small portion of funds. Investors with a similar view could consider doing the same.
