With so many stocks being sold off this year, dividend yields are surging, opening the door to some exciting passive income opportunities.
Typically, a high yield is often an early indicator of an upcoming dividend cut. And there are undoubtedly plenty of stocks heading in that direction today, courtesy of the ongoing economic volatility.
However, not every business is struggling. In fact, I’ve spotted one promising enterprise seemingly thriving in the current environment. And it may continue to do so even after the storm has passed. That’s why it’s already in my portfolio and could also be a fine investment for other Foolish investors.
Turning renewables into passive income
It’s no secret that the electricity demand is rising. Yet with global warming becoming an evermore present threat, a lot of investments have been made in renewable energy technology over the last decade.
Consequently, renewables have not only become more efficient, but also far cheaper. So much so that the UK government is pushing heavily into expanding the country’s green energy infrastructure to become less reliant on natural gas.
This trend has been terrific for Greencoat UK Wind (LSE:UKW). As a reminder, the business owns a vast portfolio of on- and off-shore wind farms across Britain. These farms generate clean electricity, which is sold to energy suppliers to power people’s homes. And as a real estate investment trust, management returns the bulk of the profits to shareholders via a 5.2% inflation-linked dividend yield.
With electricity prices exploding this year, the firm’s cash flow has followed suit. Unsurprisingly, it’s provided immense financial flexibility. In the first six months of 2022, around £50m worth of debt has been wiped out. Meanwhile, there was plenty of spare capital to expand its asset portfolio. That includes a £400m investment into Hornsea 1 – the world’s second-largest wind farm powering more than 1m homes.
Given demand for electricity is expected to continue surging over the next decade, the impressive passive income offered by Greencoat shares looks like it’s here to stay.
Understanding the risks
As exciting as this income opportunity seems, there are some significant threats to be aware of. Firstly, even after paying down some of its debt, there’s still roughly £900m of loan obligations on Greencoat’s books. With interest rates rising, this could put considerable pressure on its dividend payout capabilities.
Furthermore, today’s elevated energy prices will not stay that way forever. And over time, as the supply of renewable energy increases, electricity prices will naturally start to fall.
That’s great news for consumers. But for Greencoat. It will undoubtedly negatively impact profit margins, slowing internal investments, and potentially harming its future passive income prospects.
Despite these risks, the business has proven to be a lucrative source of dividends for my portfolio, so far. And while energy prices will inevitably fall, the expansion of its asset portfolio today could offset this impact through increased volume of electrical production.
That’s why I believe this dividend stock could be a no-brainer buy for long-term investors.
