I’d buy 11,987 shares of this UK dividend stock for £1,000 a year in passive income

Ben McPoland considers one out-of-favour dividend stock from the mid-cap index that’s carrying a mighty 10.7% yield right now.

| More on:
Solar panels fields on the green hills

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Perusing the FTSE 250, one dividend stock in particular stands out to me for its eye-popping yield. That’s NextEnergy Solar Fund (LSE: NESF), which has a huge 10.7% yield.

Often, such a high figure would be a red flag, suggesting that the payout may not be sustainable and that investors are pricing in a sizeable dividend cut.

However, this renewable energy fund recently raised its payout for the 11th consecutive year. And the future still looks very bright, despite a big drop in the share price over the past few years.

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. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

How it generates revenue

NextEnergy Solar is a specialist investor in solar assets and energy storage. At the end of March, its portfolio had 103 operating assets, enough to power the equivalent of 301,000 homes for one year.

Source: NextEnergy Solar Fund

A significant portion of the fund’s revenues comes from government-backed subsidies and power purchase agreements (PPAs). These are often indexed to inflation. This means that as inflation rises, the payments it receives also increase, providing a natural hedge.

The UK’s target is for 70GW of solar capacity by 2035. This fund’s portfolio has already reached 1GW of installed capacity! So it’s a big and important player in the space.

Why is the share price in the doldrums?

As we can see in the chart above, the share price has fallen from 126p at the start of 2020 to just 78p today. The chief culprit for this is higher interest rates. They’ve impacted the entire renewables sector by increasing the cost of financing for both existing and new debt.

At the end of March, the company’s financial debt was £338m. Of this, 32% was on a floating rate (not fixed), so the high-rate environment is an ongoing risk here.

To reduce debt, the company has embarked on a capital recycling programme. It recently sold a 35.2MW solar farm in Lincoln for £27m. This transaction represented a 14% premium to the March holding value, which is very encouraging to see.

Proceeds from this will be used to reduce the company’s debt. Three other assets are still up for sale.

Massive discount

Higher rates also tend to negatively impact the value of assets, including solar farms. Currently, the fund is trading at a whopping 26% discount to net asset value (NAV).

The board thinks this discount is unjustified and has approved a share buyback programme of up to £20m to try and narrow it.

Chairwoman Helen Mahy said: “NextEnergy Solar Fund continues to maintain a strong financial platform in a challenging environment… [We] view the current size of the company’s discount to NAV as unjustified.”

Big passive income potential

I agree and think that when the Bank of England starts to cut interest rates, the share price could be set for a nice rebound. Longer term, I remain bullish on the clean energy sector and this fund in particular.

Meanwhile, there is that massive 10.7% dividend yield. At the current price, I’d need to buy 11,987 shares to aim for £1,000 in annual passive income. This would set me back £9,350.

While no payout is guaranteed, I reckon the chance to lock in such high-yield passive income is well worth the risk here. So I’m looking to buy this stock myself.

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.

Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Down 23%! Should I buy more CrowdStrike shares for my Stocks and Shares ISA?

Sometimes bad news can be good news for long-term investors. But is that the case for CrowdStrike in relation to…

Read more »

Investing Articles

2 UK shares near 52-week lows I’m considering snapping up

These UK shares are loitering near, or at, 52-week lows. Are these prime opportunities for our writer to boost her…

Read more »

Investing Articles

Unilever: a passive income stock with potential for decades of dividend growth

Stephen Wright thinks Unilever can keep reducing its share count for years to come. And this should help make it…

Read more »

Middle-aged black male working at home desk
Investing Articles

Worried about retirement? I’d buy high-yield dividend shares to build wealth

The number of pensioners enduring poverty in the UK looks set to rise. Investing in dividend shares could help Britons…

Read more »

Investing For Beginners

2 boring but beautiful FTSE 100 stocks to add to my ISA

Jon Smith runs over a couple of FTSE 100 stocks that he really likes the look of, even though they…

Read more »

Investing Articles

Here’s how I could supercharge my wealth by snapping up the best dividend stocks!

This Fool explains how dividend stocks play a crucial part of her aspirations to build wealth, and details one pick…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Revenue up 10% and accelerated growth potential for this overlooked FTSE 250 company

Today's first-quarter update from this good-value FTSE 250 company keeps me keen on the stock as recovery and growth continues.

Read more »

Investing Articles

Here’s why I’m so bullish about the BT share price now

The BT share price shot up after FY results, and a couple of months on it's still up there. Might…

Read more »