There are obviously many ways to secure a second income. But one of the most time-tested methods is through investing in companies that pay out a proportion of their earnings to shareholders via dividends.
When it works, the beauty of this approach is that it’s possible for me to achieve a rising income over many years without lifting a finger. That’s why I’m always on the hunt for high-quality dividend stocks to add to my portfolio.
Here’s one renewable energy stock I’d snap up today if I had spare cash to invest.
Winds of change
Greencoat UK Wind (LSE: UKW) is a renewable infrastructure fund in the FTSE 250 that operates wind farms across the UK. These increase the supply of home-grown and clean energy, a high-priority policy of the UK government.
The company aims to increase the dividend in line with retail price index inflation while reinvesting excess cashflow in additional wind farms, both onshore and offshore.
Greencoat is the largest of its kind in the UK, with a portfolio of more than 1,000 turbines across 46 wind farms. These have an aggregate net capacity of 1,652 megawatts, which is enough to power well over a million homes.
A recent acquisition was the Dalquhandy wind farm in South Lanarkshire for approximately £50m. This site benefits from a 10-year fixed price PPA (power purchase agreement) with BT for 80% of its output.
Passive income generation
The stock currently carries a dividend yield of 5.2%, which is higher than the market average. That’s based on last year’s dividend payout of 7.72p per share.
The good news is that analysts anticipate this year’s dividend will rise to 8.73p per share. That gives the stock a forward dividend yield of 5.86%.
Of course, this payout isn’t a sure thing. But assuming last year’s dividend per share is met once again this year, I’d need 12,920 shares to generate £1,000 a year in passive income. That would set me back a cool £19,250 at today’s share price of 149p.
While I like this stock, I wouldn’t put all my eggs in one basket. I’d make it only a part of my well-diversified income portfolio.
Tailwind blow
Now, it should always be remembered that dividend payouts are the distribution of corporate earnings and therefore not guaranteed. But I like that the company continues to generate significant cash flow in excess of its dividend.
One specific thing I’d need to bear in mind as an investor here is how government policy can affect businesses such as this. For example, we’ve seen recently how electricity generators — even low-carbon renewable energy producers — can be subject to windfall taxes. Further levies can’t be ruled out in future.
That said, Greencoat is playing its role in decarbonising the UK economy, which is an ultra-long-term trend that I only see gaining strength. I doubt the government will want to hammer renewable energy generators too much, for fear of scaring off further investment.
Finally, the stock is currently trading at a 8.3% discount versus its net asset value. So it may well even prove to be a bargain at today’s price.
