Some of the highest-yielding income shares in the FTSE 350 operate within the energy industry. Oil stocks like Diversified Energy Company, Ithaca Energy, and Energean currently offer chunky payouts that could make any dividend investor’s mouth water.
Yet, even with new temporary tax levies, renewable energy businesses also offer tasty income opportunities. Many of which look far more sustainable than their fossil fuel rivals. So much so that I’ve already added one to my income portfolio and identified two others as potential candidates for future investment. Let’s take a closer look.
The UK’s future #1 resource?
Being an island, it’s no secret that the UK can be a pretty windy place. In fact, eastern coastal regions near Grimbsy are some of the windiest places on Earth. So it’s no wonder that the world’s largest wind farm, Hornsea 2, is located there. Or that Hornsea 3, which will be roughly twice as large, is being built there as well.
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The east coast is far from the only windy place in the UK. And the abundance of this renewable resource has proven to be exceptionally valuable to Greencoat UK Wind (LSE:UKW). The firm owns a vast portfolio of on- and off-shore wind farms across the country, selling the electricity they generate to energy providers like Centrica.
Since demand for clean energy is only increasing, the group’s cash flows have steadily been bolstered from both expansion of its portfolio and higher energy prices. Subsequently, management has hiked dividends for eight consecutive years, consistently outpacing inflation. That’s why it’s already in my portfolio.
Two more green energy winners?
Greencoat is not the only renewable stock out there. Foresight Solar Fund (LSE:FSFL) and Gore Street Energy Storage Fund (LSE:GSF) are two others I’m currently keeping my eye on. The former operates in a similar fashion to Greencoat, using solar instead of wind farms. While the latter is specialising in energy storage solutions. After all, the sun isn’t always shining, nor is the wind blowing, making energy storage a key component in the renewable energy chain.
Both companies appear to have similar cash generative capabilities, with Foresight already proving itself a reliable source of expanding passive income. Gore Street is currently a bit more speculative. But if successful, it could be a lucrative source of returns.
However, as promising as all these enterprises seem, they all share some common weak spots. The most prominent being the lack of pricing power. The UK energy industry is highly regulated, with companies having next to no control over the prices they can charge. And with most of their costs fixed, this can turn into a serious disadvantage when energy prices drop.
Even ignoring this problem, expanding energy infrastructure is hardly cheap. These businesses have already racked up considerable debt over the years to fund expansion. And while they’re seemingly able to keep up with their current loan obligations, the recent interest rate hikes will undoubtedly make future expansion more challenging.
The bottom line
Renewable energy companies on the London Stock Exchange currently look like a terrific source of passive income. However, even owning a diversified basket of these firms exposes a portfolio to common threats. Therefore, investors could be well served to blend an income portfolio with both renewable energy stocks and businesses from other industries.
