With its 7% dividend yield, I think this undervalued FTSE 250 stock is an opportunity not to miss

This high-yield dividend payer is a solid FTSE 250 value share with decent growth potential. Not only that, but it’s helping to build a sustainable future.

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With all the attention on high-yield dividend shares in the FTSE 100, I decided to see what’s available within the FTSE 250 instead. 

There’s a decent amount of mid-cap stocks with not only high yields but promising growth prospects. Take ITV, for example. It has a 7% dividend yield and is estimated to be undervalued by 68% based on future cash flow estimates. And TP ICAP, with a 6.8% yield, is estimated to be undervalued by 62%.

I’d consider both stocks great additions to a dividend portfolio. But today I’m looking at a different type of stock altogether. Greencoat UK Wind (LSE:UKW) is a real estate investment trust (REIT) with a focus on renewable energy. 

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Investing in a green future

I think Greencoat UK Wind is one of the best-performing dividend stocks on the FTSE 250 at the moment, with an attractive 7.2% yield. That’s considerably higher than the 3.4% average found across the rest of the FTSE 250 index. It also has a solid track record, paying consistent quarterly dividends since 2015 without missing a single one.

It may not be a household name yet, but it’s responsible for powering 2.3m homes in the UK. Operating both onshore and offshore wind farms, it’s developed beneficial relationships with fellow UK energy giants SSE and Centrica. With a sharp rise in electric vehicles and an increasing move away from gas in households, electricity demand is likely to continue growing. And with the company currently in a dominant position, it looks set to benefit from this growth.

Things to think about

Although a 7% yield is impressive, there are other things to consider. Like most investment funds, REITs charge management fees so the net value of the yield should actually be calculated to be lower. When subtracting Greencoat UK Wind’s fees of 0.9%, the return on yield is more like 6.3%. That’s still almost double the FTSE 250 average though.

And while electricity demand is set to increase, caps on energy bills mean companies like this one won’t necessarily benefit. Furthermore, independent analysts forecast earnings and revenue to decrease in the coming years, with a potential for recovery only in 2026. Earlier this month, the trust released its net asset value (NAV) update for the first quarter of 2024, noting a minor 0.4% decrease from the start of the year. This was attributed to lower-than-expected power availability compounded by an outage at its Hornsea 1 facility. 

The verdict?

I like the prospects of renewable energy because it’s a nascent but burgeoning industry backed by governments, scientists and researchers worldwide. Whatever one’s personal feelings on climate change are, I think it’s an industry with a strong future.

Despite the above risks, I believe Greencoat UK Wind has proved its position as an industry leader through ongoing investment and development. Furthermore, with total assets of £5.6bn and £1.8bn in liabilities, it has a solid balance sheet that suggests good management. Its £1.8bn of debt is easily covered by £3.8bn in equity, resulting in a low debt-to-equity ratio of 47.2%. 

These are reassuring figures, reducing the likelihood of financial troubles in the near future. As such, I think investors would be smart to consider it for a dividend stock portfolio. I know I certainly will!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Mark Hartley has positions in ITV. The Motley Fool UK has recommended Greencoat Uk Wind Plc and ITV. 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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