High-yield income shares need to be treated with caution. For me, anything with a yield above 10% needs further inspection before being able to call it a smart investment or a no-brainer. So when one came across my desk this week, I decided to do some digging. What did I find?
Gone with the wind
I’m talking about Greencoat UK Wind (LSE:UKW). With the share price down 18% in the last year, the dividend yield sits at 10.1%. The company owns stakes in dozens of operational wind farms across the UK. These turbines generate electricity that is sold into the wholesale market. And many assets also benefit from long-term government-backed renewable support schemes that provide inflation-linked income. This means the company produces stable cash flows, with the primary objective of paying shareholders a steadily growing dividend.
Of course, we do need to address the fall in the share price. In my opinion, the decline says more about market sentiment than the underlying business. Renewable infrastructure trusts have been under pressure ever since interest rates began rising. This is because loans are needed to fund new large projects, so the cost of financing has increased.
At the same time, Greencoat’s net asset value (NAV) has been hit by lower electricity price forecasts following the decline in natural gas prices. This is a risk going forward, but the lower price has acted to push the yield higher.
Dividend sustainability
A high yield often signals danger to me, but in Greencoat’s case the dividend has historically been supported by operational cash generation rather than excessive borrowing. Management has continued to target annual dividend growth, and even links the increase to inflation. The business also continues to generate cash comfortably in excess of its dividend payments, with a dividend cover ratio of 1.3. Any number above one shows it can cover the dividends from the latest earnings.
Looking ahead, I think there’s a decent case for sustained income. If interest rates fall over the coming years, infrastructure assets could become more attractive as investors rotate back toward reliable income-producing investments. Greencoat also trades at a 23% discount to the NAV, potentially. This means the stock could rally to a fairer value over time. These gains could then go towards an overall return for an investor along with the dividend yield.
Putting it all together
Overall, I certainly wouldn’t describe the stock as a no-brainer, but the return is generous given the 10.1% yield. Given that the dividend currently appears well supported, I’m looking at investing a small amount to test the waters. Investors who are happy with the risk level and are hunting high-income opportunities could consider doing the same.
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Jon Smith does not hold any positions in the companies mentioned
