Greencoat UK Wind (LSE:UKW) is one of many REITs within the FTSE 250 offering a generous yield right now. The renewable energy group continues to generate exorbitant volumes of cash as demand for electricity continues to rise, even at slightly lower prices.
Right now, investors can lock in a 7.6% yield versus the 3.3% currently being offered by its parent index. And at that rate, investing around £6,580 would unlock a £500 passive income stream today. But could this dividend income grow even higher in the long run?
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A future Dividend Aristocrat?
Greencoat was launched in 2012, making it a relatively young enterprise compared to the energy industry titans. Yet over the last decade, the firm’s expanded into becoming the largest owner of wind energy assets in the UK by generating capacity.
Across all of its assets, Greencoat has a generating capacity of just over two gigawatts (GW) of electricity. That’s roughly enough to power 2.3 million homes and represents around 7% of the UK’s total wind power infrastructure.
So far, wind turbines have proven to be the most efficient and, consequently, mature renewable energy technology. And with plans to expand the country’s wind power capacity to 50GW by 2030, the opportunities for growth are still substantial. And since clean electricity demand’s expected to continue rising as electric vehicle (EV) adoption accelerates, Greencoat doesn’t look like it’s going to be short on cash flow.
With the electricity being sold almost immediately as it’s being generated, management has had little trouble raising dividends over the years. In fact, the firm’s currently sitting on its ninth consecutive year of payout hikes – a trend that looks set to continue in the long run. As such, investors may be looking at a future Dividend Aristocrat.
Reining-in expectations
While the long-term outlook for this enterprise looks bright, there are a few uncertainties and caveats to consider. For starters, the 50GW target was set by a previous government. And now with Labour in power, politically speaking, the party appears in favour of supporting renewable energy development. But there’s no guarantee it’ll maintain this target.
But even if it does, Greencoat has lost the advantage of low interest rates. Even after the Bank of England started cutting interest rates, consensus suggests that the days of near-zero rates are over. As such, the firm will have to adapt to a new monetary environment where growth will be more challenging. Don’t forget with so much of its net earnings paid out as dividends, the group’s highly dependent on external financing.
Despite these challenges, management seems to be adapting well. Dividend cover remains strong at 2.1 times, even with higher interest rates. And the cash-generative nature of operations remains intact. Furthermore, as rates fall, management will no doubt find refinancing opportunities to bring down the debt burden and continue its dividend hiking streak.
That’s why, even with these risks, I think Greencoat continues to look like an attractive income investment for my portfolio when I have cash to spare.
