High-yield stocks can be a tremendous source of passive income, provided they can be maintained. After all, investors simply need to hold shares in their portfolio and watch the money roll in.
Buy-to-let can also be just as lucrative. But it requires a lot more effort in dealing with tenants, paying for repairs, and negotiating with estate agents.
That’s why, if presented with an opportunity in private rental real estate or income stocks, I’d choose income stocks every time. Of course, these assets also have their downsides and risks, especially when venturing into high-yield territory. Why? Because a high level of payout can actually be an early warning sign for unsustainability. That’s what makes Foresight Solar Fund (LSE:FSFL) so interesting.
Should you invest £1,000 in Foresight Solar Fund Limited right now?
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Falling share price, rising opportunity
As the name suggests, Foresight Solar invests in solar farms across the UK, Australia and Spain, as well as a few battery storage assets.
Since the start of 2023, shares of this renewable energy enterprise haven’t had the best of times. The valuation’s tumbled by almost 25% as rising interest rates put pressure on its leveraged balance sheet. And with energy prices also falling over this period, paired with wet weather conditions, the group’s operating cash flow has started feeling the pinch, falling by 14.8% in 2023.
Obviously, that’s frustrating to see and it’s not surprising that the stock’s been punished as a result. Yet, despite how things appear right now, the long-term potential’s looking increasingly promising.
Clean energy demand forecasts are gradually getting more bullish as the effects of climate change become more apparent. And with the electrification of the automotive sector paired with a significant increase in training artificial intelligence (AI) models in data centres, electricity consumption’s set to skyrocket over the next decade.
A terrific yield to buy now?
The long term looks excellent. But what about the short term? Operating cash flows have suffered of late. Yet despite this, dividend coverage remains steady and on track to reach 1.5 times by the end of 2024. That’s even after the firm just hiked shareholder payouts once again for the ninth year in a row.
Debt does pose a bit of a threat now that interest rates are higher. However, even with this added pressure, the firm’s gearing stands at 39.2% of its gross asset value versus its 50% maximum limit. And in the meantime, management‘s placed debt reduction at the top of the priority list for its capital allocation strategy.
As of March, the firm has £429.5m of outstanding loans versus £442.6m a year ago, with plans to reduce this even further. But beyond debt reduction and dividends, it seems the group’s also capitalising on its cheap share price, with £30m of its £40m May 2023 share buyback scheme having already been executed.
Moving forward, the risks for this business remain apparent. Foresight will always be at the mercy of unpredictable weather and shifting energy prices. However, the group’s proven itself to be quite resilient in the face of macroeconomic uncertainty, continually raising dividends while keeping debt in check. Therefore, despite the risks, I think this business could make a fine addition to my income portfolio once I have more capital at hand.
