We’re more than halfway through 2024 and many UK stocks are still offering eye-popping dividend yields. So I continue to plough money into some of these to increase my own passive income prospects.
But I’m not fooling myself into thinking that these ultra-high yields will always be there. Interest rates are due to start coming down, possibly as soon as August, which could lead to more money shifting from cash into dividend stocks. And as share prices rise, yields fall, all else being equal.
Meanwhile, negative sentiment towards the UK stock market from some international investors could turn on a dime. Just look at Japan’s stock market, which has experienced a significant resurgence in recent years after a prolonged period of underperformance. It could happen here.
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Finally, a more stable political landscape can also benefit the UK’s economy and stock market. History suggests that a change of government often drives above-average returns in the year after an election (though that’s far from guaranteed).
The point being that some of the 8% to 10%+ yields we see around the UK market today could soon be a distant memory. This might be a once-in-a-decade opportunity to bag this level of passive income.
Monster income on offer
Now, to get a flavour of the potential income on offer, let’s look at the FTSE 250‘s highest 10 yields:
| Dividend yield* | |
| Ithaca Energy | 16.3% |
| NextEnergy Solar Fund | 10.3% |
| Ashmore Group | 9.9% |
| SDCL Energy Efficiency Income Trust | 9.9% |
| TwentyFour Income Fund | 9.7% |
| Abrdn | 8.8% |
| GCP Infrastructure Investments | 8.7% |
| Foresight Solar Fund | 8.7% |
| Sequoia Economic Infrastructure Fund | 8.6% |
| Energean | 8.6% |
Of course, it would be foolish to just start buying up all these stocks. A high yield is often a red flag and suggests the market doesn’t think the payout is sustainable. Dividends can and often do get cut.
But I’d say some of these definitely merit further investigation. There are a couple on there that I haven’t really dug into at all yet.
Renewable energy
One that has been on my radar though is NextEnergy Solar Fund (LSE: NESF), the second-highest yielder on the list above.
This fund has a portfolio of 103 operating solar assets in the UK and Italy. These power the equivalent of 301,000 homes with renewable energy for one year.
As we can see above, the share price has been under major pressure, falling from 121p in September 2022 to just 80p today. The chief culprit is the higher interest rate environment we find ourselves in.
This has driven up the firm’s costs to service its debt, while also knocking the value its solar assets. Moreover, any chance of building out its portfolio to drive further income is essentially on hold for now.
Indeed, it’s in the process of selling off a handful of assets to pay down debt. A risk here is if it can’t sell these for an attractive enough return. That could weaken investor sentiment even further.
As bad as all that sounds though, the fund still raised its dividend by 11% to 8.35p per share last year. And that payout was covered 1.3 times by cash, its tenth consecutive year delivering a healthy cash-covered dividend.
Of course, there are risks with this one, as indicated by the sky-high yield. Still, with some spare cash, I’d be tempted to take the opportunity to earn £10.30 back from every £100 invested in the stock.
