The mid-cap FTSE 250 index isn’t the first place most investors look for high dividend yields. However, I think it could be a mistake to ignore this part of the market when hunting for income.
My research suggests there are some attractive high-yield opportunities in the FTSE 250 right now. The stock I’m going to look at today has a forecast dividend yield over 10%. Here’s why I’m interested.
US exposure adds diversity
SDCL Energy Efficiency Income Trust‘s (LSE: SEIT) an investment trust centred on clean energy assets in the UK and US.
The trust’s largest investment is US firm Onyx, which provides solar panel systems to business customers in 14 states. In the UK, SDCL’s invested in the EV Network (EVN), which provides electric vehicle charging infrastructure.
SDCL listed on the London market in 2018 and has maintained a dividend that’s been covered by distributable cash since payouts started in 2019.
In an update in September, the trust’s management confirmed that SDCL is on track to deliver a target dividend of 6.32p per share for the 2024/25 financial year. That gives the shares an impressive forecast yield of 10.5%, at the time of writing.
Short-term challenges
One of the reasons for this very high yield is that SDCL’s shares are currently trading at a 30% discount to their 24 March net asset value of 90p per share. Big discounts are common across the renewable energy investment trust sector at the moment, mainly due to the impact of higher interest rates.
This big discount is both a risk and an opportunity, in my view.
If SDCL can maintain its debt financing at affordable levels and sustain its dividend, I think the shares should trade closer to book value over time.
The challenge right now is that because the shares are trading at a discount to book value, SDCL can’t raise money by issuing new shares. This means the only route to raise cash is through debt or asset sales. SDCL says it needs to provide additional funding to support the growth of Onyx and EVN.
Management’s in the process of negotiating an extended debt facility and expect to provide an update later this year. But the situation’s still uncertain at the moment.
Why I’m interested
A number of other renewable energy trusts have recently agreed asset sales at prices in line with their book value. SDCL’s track record has been good so far, in my view. My guess is it’ll also be able to achieve disposals at attractive prices.
If I’m right, SDCL will be able to repay some debt and reassure the market that its value estimates are realistic.
In the meantime, this year’s dividend is expected to be fully covered. Interest rates are also still expected to fall, albeit perhaps more slowly than originally expected.
On balance, I think SDCL shares offer an opportunity for me to lock in a high yield. Over time, I could also benefit from useful capital gains.
I’m fully invested at the moment. But if cash becomes available in my income portfolio, I’ll certainly consider an investment in SDCL.
