I don’t think many of us would disagree that renewable energy is a key theme for the future. At the same time, one common investing strategy many of us have is to hunt for income. So to combine the two and find an attractive renewable energy dividend stock is the best of both worlds.
Here’s one I’ve spotted with a juicy yield.
Details of the income share
The stock in question is the NextEnergy Solar Fund (LSE:NESF). The FTSE 250 company has a current dividend yield of 11.5%. Over the past year, the share price is down 11%.
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The business focuses on buying, owning and operating solar assets in the UK and Europe, generating renewable energy in the process. It has a strict investment policy relating to diversification, which helps to reduce the risk associated with any one project. No one solar farm or similar asset can be more than 30% of the gross portfolio asset value.
It generates revenue through the energy sales, alongside government support. Over time, the share price should also rise to reflect the increase in value of the solar assets. In theory, the share price should reflect the net asset value (NAV) of the portfolio. However, the stock’s currently trading at a 27% discount to the NAV.
Why the yield isn’t a fairytale
One of the concerns whenever I see a dividend yield above 10% is that it might not be sustainable. However, with NextEnergy, this doesn’t appear to be the case.
The dividend history’s strong. It pays out quarterly income out to shareholders, which has been increasing year-on-year for several years now. Of course, past performance doesn’t guarantee future returns. But it does give me some confidence that things can continue as before.
The forecast dividend cover for the current financial year is 1.1-1.3 times. As this is above 1, it means that the projected earnings per share will be able to cover the dividend. This is a good sign and means I don’t see any immediate concerns about the dividend being cut.
High funding costs
One risk is that the share price could keep falling. For example, banking the 11.5% dividend yield’s great, but if the stock falls another 11% in the next year, my total unrealised profit’s basically zero.
A factor in the falling share price has been interest rates staying higher for longer. The company uses loans to help fund new projects. At the moment, it has a loan-to-value ratio of 46%. This means that for every £100 invested, it borrows £46. This is quite high, so with an elevated interest rates it causes the debt servicing costs to remain expensive.
Even though this is a concern going forward, I don’t see it as a large enough problem to derail the company. Therefore, I’m seriously thinking about buying the stock for my portfolio.
