Official figures for June show that over 6m more trades were placed for stocks on the FTSE 250 than the FTSE 100. In cash terms, this equates to a difference of more than £80bn.
Based on these numbers, the UK’s second tier of listed companies is clearly the poor relation. Yet it’s home to many high-yielding dividend shares that could appeal to income investors. Let’s take a closer look.
Delving deeper
The current (16 July) yield on the FTSE 250 is 3.5%, beating the Footsie’s 3.1%.
But as is often the case, focusing on an average hides a wide variation. For example, based on the past 12 months, there’s an incredible 54 FTSE 250 members yielding 5% or more.
One of these is Greencoat UK Wind (LSE:UKW). It was the country’s first renewable energy infrastructure fund and its £2.8bn portfolio of wind farms (both onshore and offshore) now contributes around 2% of the UK’s electricity.
The fund’s targeting a dividend of 10.7p for 2026. If this is achieved, it means the stock’s currently offering an incredible forward yield of 10.4%. Why so high?
Investor concerns
Although the fund continues to pay an attractive dividend that it’s pledged (no guarantees, of course) to increase in line with inflation, it’s the fall in its share price that’s been the biggest contributor to its above-average yield.
However, based on the value of its assets, this doesn’t appear justified. In fact, the fund now trades at a massive 23.75% discount to its net asset value (NAV).
Although the fundamentals of the market are strong — data centres, electric vehicles, and heat pumps are all increasing demand for electricity — the nation’s finances aren’t in such good shape. As a result, the government’s announced that it will abolish the Carbon Price Support from April 2028. This means electricity prices could fall by up to £5/MWh reducing Greencoat’s NAV by 3p-5p a share.
The fall in its NAV per share has another consequence. It means the trust’s close to its gearing limit of 40%, which restricts the amount it can borrow to fund further expansion.
On the other hand…
Despite these challenges, investors appear committed with 97.08% of shareholders voting against winding up operations at the annual general meeting.
And with the trust’s share price not reflecting the true worth of its assets by such a wide margin, it could be argued that the shares are in bargain territory. A near-25% discount, coupled with a double-digit yield, is an attractive proposition.
Indeed, the trust has increased its annual dividend for 13 consecutive years.
Volatile energy prices remain a concern. But to help mitigate this, the fund entered into various hedging arrangements. In April, it announced that 68% of its cash flows were “fixed in nature” through until March 2027. Although wind speeds can vary, output’s reasonably predictable.
Also, with Ed Miliband widely tipped to become the UK’s next chancellor, I think the renewable energy sector could have a powerful friend in the Treasury.
Personally, I think investors are being overly cautious. This could be a rare opportunity to acquire a FTSE 250 stock with a double-digit yield at a knock-down price.
That’s why I think a small shareholding’s worth considering as part of a well-diversified portfolio.
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James Beard does not hold any positions in the companies mentioned.
