Quality FTSE dividend-paying stocks can offer a great opportunity to build passive income, in my view.
I reckon Greencoat UK Wind (LSE: UKW) is an ideal stock to help. Here’s why I’m a fan, and why I plan on snapping up some shares as soon as I can.
Renewable energy boom
The transition away from traditional fossil fuels is ramping up. Enter renewable energy alternatives! Greencoat owns and operates a range of onshore and offshore wind farms. The electricity it generates is then sold to larger energy companies. Some firms Greencoat currently sells to are SSE and Centrica, for example.
Greencoat shares are down 17% over a 12-month period, from 163p at this time last year to current levels of 135p.
I believe this is due to external events, especially the volatility at the moment, and specifically issues in the energy sector. However, I view the drop as a great opportunity to snap up cheaper shares!
Four key bullish traits build my investment case
Firstly the sentiment around renewable energy alternatives, and the market as a whole, is very much flavour of the moment. I don’t see this changing, especially as the world recognises the need to move away from traditional fuel types. In fact, many governments have lofty net zero targets, and firms like Greencoat should benefit here, in my view.
Next, I believe that Greencoat has a certain amount of defensive ability. This is because energy is an essential requirement for all, including homes, businesses, and more. Due to this, I reckon performance and payouts could remain relatively stable.
Moving on, the passive income opportunity looks excellent to me. A dividend yield of 7.2% is nearly double the FTSE 100 average of 3.8%. For example, if I had £13,900 to invest right now, I could earn £1,000 in annual dividends! Plus, the payouts look safe, due to Greencoat’s healthy balance sheet. However, it’s worth mentioning that dividends are never guaranteed.
Finally, the shares look great value for money on a price-to-earnings ratio of just over six. Volatility in recent months may have hurt the share price, but it has left the shares in a great place for potential investors, like me.
Risks and final thoughts
From a bearish view, growth could be tougher than expected, despite burgeoning demand. This is because planning restrictions for new wind farms are strict. Plus, Greencoat borrows money to fund growth. This could be tricky as during times of higher interest rates, like now, debt could be costlier to service and could impact payout levels.
Finally, UK energy regulator OFGEM could intervene and cap profit levels and potentially investor returns. This is something I’ll keep a close eye on.
Overall, I think Greencoat is a great stock to buy and hold for a long period for growth and returns. For me, the pros outweigh the cons, and by some distance too.