A renewable energy dividend stock with an 11.5% yield? Tell me more!

Jon Smith explains why he feels this dividend stock from a key sector with a high yield could be sustainable into the future.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Renewable energies concept collage

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.

I don’t think many of us would disagree that renewable energy is a key theme for the future. At the same time, one common investing strategy many of us have is to hunt for income. So to combine the two and find an attractive renewable energy dividend stock is the best of both worlds.

Here’s one I’ve spotted with a juicy yield.

Details of the income share

The stock in question is the NextEnergy Solar Fund (LSE:NESF). The FTSE 250 company has a current dividend yield of 11.5%. Over the past year, the share price is down 11%.

Should you invest £1,000 in Nextenergy Solar Fund Limited right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Nextenergy Solar Fund Limited made the list?

See the 6 stocks

The business focuses on buying, owning and operating solar assets in the UK and Europe, generating renewable energy in the process. It has a strict investment policy relating to diversification, which helps to reduce the risk associated with any one project. No one solar farm or similar asset can be more than 30% of the gross portfolio asset value.

It generates revenue through the energy sales, alongside government support. Over time, the share price should also rise to reflect the increase in value of the solar assets. In theory, the share price should reflect the net asset value (NAV) of the portfolio. However, the stock’s currently trading at a 27% discount to the NAV.

Created with Highcharts 11.4.3NextEnergy Solar Fund PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Why the yield isn’t a fairytale

One of the concerns whenever I see a dividend yield above 10% is that it might not be sustainable. However, with NextEnergy, this doesn’t appear to be the case.

The dividend history’s strong. It pays out quarterly income out to shareholders, which has been increasing year-on-year for several years now. Of course, past performance doesn’t guarantee future returns. But it does give me some confidence that things can continue as before.

The forecast dividend cover for the current financial year is 1.1-1.3 times. As this is above 1, it means that the projected earnings per share will be able to cover the dividend. This is a good sign and means I don’t see any immediate concerns about the dividend being cut.

High funding costs

One risk is that the share price could keep falling. For example, banking the 11.5% dividend yield’s great, but if the stock falls another 11% in the next year, my total unrealised profit’s basically zero.

A factor in the falling share price has been interest rates staying higher for longer. The company uses loans to help fund new projects. At the moment, it has a loan-to-value ratio of 46%. This means that for every £100 invested, it borrows £46. This is quite high, so with an elevated interest rates it causes the debt servicing costs to remain expensive.

Even though this is a concern going forward, I don’t see it as a large enough problem to derail the company. Therefore, I’m seriously thinking about buying the stock for my portfolio.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

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.

Jon Smith 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.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Dividend Shares

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Dividend investors! Here’s what Warren Buffett says builds wealth in the stock market

Reinvesting dividends at yields of 8% or higher looks like a good way of building wealth. But Warren Buffett has…

Read more »

Dividend Shares

Of the 20 highest-yielding FTSE 100 stocks, this is my top pick

This FTSE 100 stock currently offers a yield of 6.4%. But Edward Sheldon believes it’s capable of providing share price…

Read more »

Investing Articles

These FTSE 100 dividend shares just got cheaper, thanks to President Trump!

Investors buying dividend shares can lock in bigger long-term yields when share prices take a tumble. These two just did…

Read more »

Investing Articles

10% dividend yield! Here’s a FTSE 100 share to consider in April for passive income

This FTSE 100 stock just soared past the 10% yield mark, making it a potentially lucrative option for investors targeting…

Read more »

Investing Articles

Here’s how Trump tariffs could hand us some top passive income bargains

As tariff terror grips the stock market, it's time for passive income investors to steel our nerves and look for…

Read more »