How excessive a yield is just too excessive?
From a passive revenue perspective, a juicy dividend yield will be very enticing. However, it will also be a pink flag that traders anticipate a lower within the payout down the road.
So it grabbed my consideration right now (26 February) when a UK share that already yields a whopping 11% raised its dividend per share but once more.
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Inflation-busting efficiency
That share is Greencoat UK Wind (LSE: UKW).
Its full-year dividend per share has been elevated to 10.35p, making this the twelfth yr in a row that it has grown in keeping with or quicker than the Retail Worth Index, a typical measure of inflation.
As this share sells for pennies, that makes it a high-yield choice I believe income-focussed traders ought to contemplate.
Is there a catch?
However may this be too good to be true?
In any case, Greencoat UK Wind’s excessive yield is way above that of most different FTSE 250 shares.
It additionally sells at a deep low cost to its internet asset worth (NAV).
Greencoat UK Wind is just not alone right here. Quite a few renewable vitality focussed FTSE 250 shares have excessive yields and promote properly under their internet asset worth.
Shifting coverage focus in the case of renewable vitality has raised issues in regards to the long-term profitability of the sector. That might be a threat to income and subsequently the dividend at Greencoat UK Wind.
The corporate is conscious of this. Because it mentioned in its outcomes assertion, “wider economic and regulatory factors, along with falling NAVs across the sector, have weighed on investor sentiment… The Board and Investment Manager recognise the need to continue to take further action to protect and build shareholder value”.
I see quite a bit to love right here
In actuality there’s solely a lot that administration can do within the face of such investor sentiment.
Utilizing spare money to purchase again shares at a reduction may assist create worth for shareholders. Final yr, Greencoat UK Wind spent £109m shopping for again its personal shares.
The corporate additionally decreased its debt principal by £168m, one thing I see as optimistic for the funding case.
However whereas such strikes would possibly assist unlock some worth, I reckon the share value may hold struggling till both there’s a wholesale reassessment of the sector by traders, or else somebody decides to bid for the corporate.
That has not occurred but and maybe by no means will. Given the low cost to NAV, I’m positive some potential patrons will need to have run the numbers on Greencoat UK Wind infrequently.
As a believer in long-term investing, although, I see the depressed share value – down 26% in 5 years – as a possibility. Together with regular dividend will increase, it has helped push the yield up.
The corporate spent £227m on dividends final yr however nonetheless ended the yr with extra cash than when it started. With its excessive yield, I see this as share for traders who wish to try to construct passive revenue streams to think about.
