When it comes to double-digit dividend yields, investors are often told to stay away as it’s usually a warning sign that something’s wrong. But there are some rare exceptions. And SDCL Energy Efficiency Income Trust (LSE:SEIT), also known as SEEIT, just released a trading update that not only confirmed it can afford its 14.2% yield but that it’s already on track to hit its sixth consecutive year of dividend hikes.
The last five years have been pretty rough for this enterprise, with the share price tumbling more than 50% – a trend that’s continued in 2025. That certainly helps explain why the yield’s so high today. But is there a reason why investors are jumping ship? Or is this secretly an exceptional income opportunity?
Investing in energy efficiency
There are a lot of different ways to invest in the energy sector. However, rather than being dependent on fluctuating oil prices, SEEIT offers a unique opportunity for investors to help boost the efficiency of energy infrastructure.
The firm owns a fairly diversified portfolio of projects scattered across the globe in technologies like solar & storage, district energy systems, gas distribution networks, electric vehicle charging, biomass, and industrial process efficiency solutions, among others.
Despite what the share price would suggest, the operational performance of the group’s flagship projects is actually quite encouraging.
For example, its Primary Energy segment, which provides energy services to US blast furnaces, is meeting earnings targets while also positioned to benefit from the new US tariffs as domestic steel production rises. At the same time, the Red-Rochester division, which specialises in district energy systems, is actually beating internal expectations. It’s a similar story for its Onyx business, which focuses on deploying on-site solar and storage solutions for commercial customers.
With all that in mind, why is the stock price falling?
Investigating the yield
Clean energy assets have been particularly unpopular among investors in recent years. Higher interest rates make these capital-intensive businesses less desirable. And it explains why other similar trusts like Greencoat UK Wind and Foresight Solar Fund have also suffered a share price decline.
This interest rate risk appears to be one of the primary concerns investors have regarding this enterprise. While the prospect of future tariffs may be beneficial for some of its projects, if the inflation they cause proves not to be transitory, interest rate cuts could be delayed and possibly reversed.
At the end of September 2024, SEEIT only generated £48m in free cash flow after debt servicing costs. That was enough to afford shareholder dividends, but the coverage ratio was pretty tight at 1.1. Should any disruption occur to cash flow generation, either internally or externally, today’s impressive dividend yield might end up getting cut.
The bottom line
For now, SEEIT’s 14% payout’s here to stay. But, there’s a significant risk of a dividend cut later in 2025 if the group’s operations are disrupted. Personally, this isn’t a risk I’m willing to take for my income portfolio. However, for investors comfortable with a higher risk dividend opportunity, this enterprise may be worth a closer look.
