In the world of income shares, a double-digit percentage dividend yield is certainly something to write home about.
There are only two UK stocks within the FTSE 100 or FTSE 250 with a yield over 10%. This isn’t surprising, as sustaining a yield this high for a company over a long period is exceptionally challenging.
I decided to dig deeper into one of the stocks to see if I believe it to be viable.
Operations aid income payments
I’m referring to the NextEnergy Solar Fund (LSE:NESF). As the name suggests, it’s a renewable energy investment fund that focuses primarily on owning and operating a portfolio of solar assets. These solar farms generate electricity, which is then sold either under long-term power purchase agreements or into wholesale electricity markets.
This business model has proven to be profitable, and it’s not hard to see why. Many of the UK solar assets benefit from government-backed subsidies, which guarantee above-market prices for electricity over long periods. This provides predictable, inflation-linked cash flows.
In my view, that’s the main reason why it’s so appealing for income investors. It hasn’t only a strong track record of paying out income, but being able to increase the dividend per share year-on-year.
Over several years, this really makes a difference. For example, back in 2021, the total dividend per share was 7.05p. In the latest year, this has risen to 8.43p.
Looking at sustainability
Part of what can push a yield higher is a falling share price. This serves as a red flag, as it indicates problems at the company that could lead to further dividend cuts down the line. For NextEnergy, the stock’s down 8% over the past year.
One reason for this is concern from investors that interest rates might stay higher for longer. This is due to inflation in the UK rising, with the latest June reading of 3.6% the highest level in over a year.
The fund uses debt in order to fund solar farm projects. As a result, interest rates play a big role in ongoing financing costs. Shifting expectations of the future interest rate path mean expenses might not fall as previously planned, a concern that has caused the stock to dip.
Even with this concern, I don’t see it as a sufficient reason to think the yield’s under threat of falling suddenly. The dividend cover is 1.2, with anything above one indicating the current earnings fully cover the current dividend per share.
If anything, the risk I see is that the yield could fall, triggered by the stock rising in value. If the stock value increases faster than the dividend per share, the yield will decrease. Therefore, it provides me with some urgency to actually buy the stock.
I’m seriously thinking about adding it to my portfolio, to benefit from the elevated yield.
