How excessive a yield is simply too excessive?
From a passive revenue perspective, a juicy dividend yield might be very engaging. Then again, it will also be a purple flag that traders anticipate a lower within the payout down the road.
So it grabbed my consideration as we speak (26 February) when a UK share that already yields a whopping 11% raised its dividend per share but once more.
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Inflation-busting efficiency
That share is Greencoat UK Wind (LSE: UKW).
Its full-year dividend per share has been elevated to 10.35p, making this the twelfth 12 months in a row that it has grown consistent with or sooner than the Retail Value Index, a typical measure of inflation.
As this share sells for pennies, that makes it a high-yield choice I feel income-focussed traders ought to think about.
Is there a catch?
However might this be too good to be true?
In any case, Greencoat UK Wind’s excessive yield is much above that of most different FTSE 250 shares.
It additionally sells at a deep low cost to its internet asset worth (NAV).
Greencoat UK Wind is just not alone right here. Quite a few renewable power focussed FTSE 250 shares have excessive yields and promote effectively under their internet asset worth.
Shifting coverage focus in terms of renewable power has raised considerations concerning the long-term profitability of the sector. That could possibly be a threat to earnings and due to this fact the dividend at Greencoat UK Wind.
The corporate is conscious of this. Because it mentioned in its outcomes assertion, “wider financial and regulatory elements, together with falling NAVs throughout the sector, have weighed on investor sentiment… The Board and Funding Supervisor recognise the necessity to proceed to take additional motion to guard and construct shareholder worth”.
I see so much to love right here
In actuality there may be solely a lot that administration can do within the face of such investor sentiment.
Utilizing spare money to purchase again shares at a reduction might assist create worth for shareholders. Final 12 months, Greencoat UK Wind spent £109m shopping for again its personal shares.
The corporate additionally decreased its debt principal by £168m, one thing I see as constructive for the funding case.
However whereas such strikes would possibly assist unlock some worth, I reckon the share worth might preserve struggling till both there’s a wholesale reassessment of the sector by traders, or else somebody decides to bid for the corporate.
That has not occurred but and maybe by no means will. Given the low cost to NAV, I’m positive some potential patrons should have run the numbers on Greencoat UK Wind on occasion.
As a believer in long-term investing, although, I see the depressed share worth – down 26% in 5 years – as a possibility. Together with regular dividend will increase, it has helped push the yield up.
The corporate spent £227m on dividends final 12 months however nonetheless ended the 12 months with additional cash than when it started. With its excessive yield, I see this as share for traders who wish to attempt to construct passive revenue streams to think about.
