Greencoat UK Wind (LSE:UKW) isn’t a well-known real estate investment trust (REIT) among most households. But it’s responsible for powering over 2.3m homes across the country through its expanding network of wind farms.
As the UK transitions away from fossil fuels to power its electrical grid, investment in renewables is ramping up. And that’s creating new opportunities for Greencoat to diversify its asset portfolio. But with interest rates temporarily dragging down the paper value of its turbines, the share price has suffered.
However, cash flow remains intact since demand for electricity continues to rise. Consequently, dividends have kept flowing and growing, maintaining its nine-year hiking streak. And combined with a lower share price, the yield now stands at an impressive 7.3%.
For reference, the average yield across its parent index, the FTSE 250, is currently 3.4%. In other words, the firm is paying more than double the market average right now. So if I had £5,000 to spare right now, how much passive income could I unlock with Greencoat?
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Crunching the numbers
As attractive as a 7.3% yield looks on the surface, it’s important to remember that REITs charge management fees reflected in the stock’s total expense ratio. In the case of Greencoat, that stands at roughly 0.9%, which brings the actual yield to 6.4%.
Excluding any transaction costs, a £5,000 investment at this rate would translate into a passive income of £320 a year. It’s certainly not a life-changing sum, but it is a welcome addition to an existing income stream.
However, as previously mentioned, management has been increasing shareholder payouts for almost a decade now. So what would this income stream increase to if it continued to do so over the next 10 years?
To date, the average annualised dividend increase stands at 8.2%. Assuming this pace doesn’t change over the next decade, that would increase the yield locked in today to 16.1% by 2034, or 15.2% after factoring in the expense ratio.
In terms of money, that’s the equivalent of a £760 passive income. And this income could be considerably higher if I were to reinvest any dividends received over this time frame as well.
Risk and reward
As exciting as these figures sound, it’s important to remember they serve only as an estimate. There’s no guarantee Greencoat will continue hiking dividends. And even if it does, the growth rate’s likely to change. So investors may end up with less than expected.
Meanwhile, electricity demand is set to skyrocket as technologies such as electric vehicles and heat pumps get rolled out across the nation. But that doesn’t necessarily mean energy prices will rise.
Let’s ignore the fact that regulators enforce price caps on energy bills for a moment. More opportunities attract new competition, especially if profit margins expand considerably as that lowers the barrier to entry for newer businesses.
The firm currently has an industry-dominant position that won’t be easy to disrupt without a considerable investment. So overall, I’m not too concerned by this threat. But it still can’t be overlooked.
Nevertheless, Greencoat has been a terrific source of shareholder wealth creation over the last 10 years. And, in my opinion, it’s on track to repeat this performance over the next decade. That’s why the REIT is already in my income portfolio, generating dividends.
