A FTSE 250 share with a 10% dividend yield that I think’s worth me buying

This FTSE 250 high yielder’s facing some challenges but could deliver knockout income and capital gains, says Roland Head.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The mid-cap FTSE 250 index isn’t the first place most investors look for high dividend yields. However, I think it could be a mistake to ignore this part of the market when hunting for income.

My research suggests there are some attractive high-yield opportunities in the FTSE 250 right now. The stock I’m going to look at today has a forecast dividend yield over 10%. Here’s why I’m interested.

US exposure adds diversity

SDCL Energy Efficiency Income Trust‘s (LSE: SEIT) an investment trust centred on clean energy assets in the UK and US.

The trust’s largest investment is US firm Onyx, which provides solar panel systems to business customers in 14 states. In the UK, SDCL’s invested in the EV Network (EVN), which provides electric vehicle charging infrastructure.

SDCL listed on the London market in 2018 and has maintained a dividend that’s been covered by distributable cash since payouts started in 2019.

In an update in September, the trust’s management confirmed that SDCL is on track to deliver a target dividend of 6.32p per share for the 2024/25 financial year. That gives the shares an impressive forecast yield of 10.5%, at the time of writing.

Short-term challenges

One of the reasons for this very high yield is that SDCL’s shares are currently trading at a 30% discount to their 24 March net asset value of 90p per share. Big discounts are common across the renewable energy investment trust sector at the moment, mainly due to the impact of higher interest rates.

This big discount is both a risk and an opportunity, in my view.

Created with Highcharts 11.4.3Sdcl Energy Efficiency Income Trust Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

If SDCL can maintain its debt financing at affordable levels and sustain its dividend, I think the shares should trade closer to book value over time.

The challenge right now is that because the shares are trading at a discount to book value, SDCL can’t raise money by issuing new shares. This means the only route to raise cash is through debt or asset sales. SDCL says it needs to provide additional funding to support the growth of Onyx and EVN.

Management’s in the process of negotiating an extended debt facility and expect to provide an update later this year. But the situation’s still uncertain at the moment.

Why I’m interested

A number of other renewable energy trusts have recently agreed asset sales at prices in line with their book value. SDCL’s track record has been good so far, in my view. My guess is it’ll also be able to achieve disposals at attractive prices.

If I’m right, SDCL will be able to repay some debt and reassure the market that its value estimates are realistic.

In the meantime, this year’s dividend is expected to be fully covered. Interest rates are also still expected to fall, albeit perhaps more slowly than originally expected.

On balance, I think SDCL shares offer an opportunity for me to lock in a high yield. Over time, I could also benefit from useful capital gains.

I’m fully invested at the moment. But if cash becomes available in my income portfolio, I’ll certainly consider an investment in SDCL.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

2 key reasons Nvidia stock could still soar from here

Even after the chipmaker's stunning performance in recent years, this writer sees reasons that could potentially help propel its share…

Read more »

Investing Articles

Here’s how £10k could set a stock market beginner on the path to riches in 2025!

Christopher Ruane sets out how taking a considered approach could mean even a stock market novice with £10k to invest…

Read more »

Investing Articles

The BAE share price struggles despite strong earnings and a 10% dividend increase. Is it still a buy to consider?

The BAE share price dipped 3% in early morning trading after posting its full-year 2024 results. Our writer considers if…

Read more »

Investing Articles

Could this Nvidia-backed growth stock be a millionaire-maker at $10?

This little-known artificial intelligence growth stock is backed by chipmaker Nvidia and recently jumped nearly 24% in a single day!

Read more »

US Stock

£10,000 invested in the S&P 500 the day before the presidential election is now worth…

Jon Smith explains how the S&P 500 has performed since last November and identifies a key winner in the months…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Should I consider buying Glencore as its share price slumps to multi-year lows?

FTSE 100 stock Glencore continues to see its share price slump. Now at its cheapest since September 2021, should I…

Read more »

Investing Articles

£5,000 invested in Lloyds shares 3 months ago is now worth…

Lloyds shares have done well over the past three months but all of the bank's FTSE 100 peers have done…

Read more »

Investing Articles

Should I buy gold stocks for my ISA or SIPP as bullion prices surge?

Many gold mining stocks are doing well at the moment. Could they be a smart buy for Edward Sheldon’s investment…

Read more »