Real estate investment trusts (REITs) continue to look like a lucrative source of passive income, even with interest rates hovering near 5%. There’s no denying that savings accounts are far more attractive today than a few years ago. Yet even with the recent boost in returns, they still fall short compared to other investment vehicles out there. And one example of a dividend stock from my portfolio is Greencoat UK Wind (LSE:UKW).
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A future Dividend Aristocrat?
Specialising in wind energy generation, Greencoat owns a royalty stake in offshore and onshore wind farms across the UK. Whenever the wind is blowing, these assets produce green electricity that’s sold to businesses like SSE, Centrica, and E.On among others.
Considering demand for electricity, especially from sources other than fossil fuels, is on the rise, the group has had little trouble finding customers. Growth has been further bolstered by skyrocketing energy prices, even with the energy price caps enforced by Ofgem and temporary windfall taxes imposed by the government.
These factors, combined with further acquisitions of wind assets, enabled the group to increase its energy-generating capacity. And in 2023, Greencoat made enough to power roughy 2.3m homes versus 1.8m a year prior.
As such, management once again hiked its dividend for the ninth year in a row. Consequently, shares of this renewable energy REIT now offer an impressive dividend yield of 7.2%. And this payout could continue to rise if dividends continue to be hiked in the long run.
Compounding passive income
At the current stock price, investing £10,000 into Greencoat translates into roughly 7,250 shares. At a dividend per share of 10p, that means a passive income stream of £725 can be unlocked overnight.
But if the company continues to grow dividends in line with its 8.2% average over the next five years, this passive income could reach just under £1,100 by 2029. And this amount could be bolstered even further if these dividends are reinvested instead of withdrawn.
Of course, dividend hikes are far from guaranteed. While demand for clean electricity is unlikely to disappear any time soon, the recent surge in profitability invites competition. And should growth in supply start to outpace demand, energy prices will drop, handicapping Greencoat’s cash flow expansion and, in turn, dividends.
It’s also important to remember that dividends aren’t the only factor to consider. With the bulk of net earnings being paid out to shareholders, REITs like Greencoat are highly dependent on debt financing. That makes rising interest rates problematic.
While the Bank of England appears to have hit a pause on further rate hikes, the higher cost of capital will likely also adversely impact growth. After all, a larger portion of the group’s cash flow is now being gobbled up by interest payments.
Having said that, these risks have yet to disturb dividends. And with the group’s financials already providing solid coverage, shareholder rewards don’t appear to be in any immediate danger. While the weather can be a bit of a wildcard, Greencoat looks primed to continue generating chunky income for decades to come, in my opinion.
