2 FTSE 250 renewable energy funds offering BIG dividends

Paul Summers highlights two renewable energy funds from the FTSE 250 (INDEXFTSE:MCX) that could be great sources of passive income for his portfolio over the next decade.

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There can’t be many hotter investment spaces right now than the renewable energy sector. Concerns over climate change and the move away from fossil fuels have led to an influx of big money into the area over recent years. Today, I’m looking at two established FTSE 250 constituents that not only provide exposure to green sources of power but also offer sizeable dividends to boot.

Chunky dividend 

First up is Renewables Infrastructure Group (LSE: TRIG). This fund has exposure to a portfolio of 79 projects with a net capacity of over 1900 megawatts. Over half of these are based in England, Wales, and Scotland. The remainder, for the most part, are in Sweden, France, and Germany.

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In terms of actual assets, there’s a clear focus on wind farms here. No less than 58% comes from onshore sources, with 32% obtained from offshore projects.

In contrast, solar energy projects account for just 9%. However, it’s clear that the company is looking to increase this part of its portfolio. Last month, TRIG announced that it had acquired four such sites in Spain. This should help boost earnings spread which, in turn, should be good news for dividend hunters.

As mentioned earlier, one of the main draws from holding TRIG is that income stream. The consensus from analysts is that the near £3bn-cap fund will return 6.76p per share in FY21. Using the current share price, that becomes a yield of 5.2% — one of the highest available in the FTSE 250. As a comparison, the index itself yields just 1.9%.

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As previously mentioned, TRIG certainly isn’t the only option for investors. Indeed, another UK-listed fund — Greencoat UK Wind (LSE: UKW) — offers an identical 5.2% dividend yield.

Greencoat has also been snapping up assets lately. In September, it announced the acquisition of Andershaw Wind Farm for £121m. Another one of the things I particularly like about this space is that demand tends to be fairly consistent due to utility firms being legally obliged to get a certain amount of power from green sources. 

This is not to say there aren’t potential drawbacks to both funds. Being dependent on natural resources (ie, things we can’t control), there’s a possibility that sources won’t produce as much electricity as desired. One also shouldn’t discount the high costs involved in installing and maintaining wind and solar farms.

Seen purely from an investment perspective, the huge interest in this space theoretically increases the odds of paying too much for a slice of the renewable pie. It’s worth pointing out that dividend hikes, while very consistent so far, aren’t exactly massive either (1%-2% per year). 

Stay diversified

Despite these potential headwinds, TRIG and UKW are just the sort of stocks I like for generating passive income. Bar the odd mood swing from Mr Market (each fell roughly 30% in March 2020), I suspect one or both could be held without issue ‘forever’. And if those dividends were reinvested, the eventual returns could be very decent.

Having said this, the need to stay appropriately diversified is as important here as it always has been. In practice, that would mean me picking up a few funds or stocks that have very little relevance to renewable energy. There’s no shortage of options out there when I last checked.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Greencoat UK Wind. 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.

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