At first glance, it appears as though SDCL Energy Efficiency Income Trust (LSE:SEIT) is the best FTSE 350 stock for passive income. With a current (23 July) yield of 11.5%, it comfortably beats the average of the FTSE 100 (3.5%) and FTSE 250 (3.4%).
What’s going on?
But as the table below shows, it hasn’t always yielded nearly three times the average of these two indexes. Around five years ago, it was close to 5%.
| Date | Dividend (previous 12 months) | Share price (pence) | Yield (%) |
|---|---|---|---|
| 31.3.21 | 5.50 | 111 | 5.0 |
| 31.3.22 | 5.62 | 118 | 4.8 |
| 31.3.23 | 6.00 | 84 | 7.1 |
| 31.3.24 | 6.24 | 59 | 10.6 |
| 31.3.25 | 6.32 | 48 | 13.2 |
| 23.7.25 | 6.32 | 55 | 11.5 |
The trust, which holds equity stakes in companies that provide energy efficiency solutions to commercial, industrial and public sector users, has increased its payout by 15% over the past five years.
However, since July 2020, the trust’s share price has halved.
Yet this downwards spiral doesn’t appear to be supported by a fall in the underlying value of the trust’s assets. In fact, this has remained relatively constant. The upshot is that the stock now trades at a 39% discount to its net asset value.
One possible explanation is that the trust’s investments are in unlisted companies. These can be difficult to value as there’s no readily-available market for their shares. It’s also the reason why a small discount‘s sometimes justified.
But in May 2024, SDCL sold a solar portfolio for £90.8m. This was at a 4.5% premium to its asset value, which gives some comfort that its valuations are not too far out.
Some issues
More generally, investment trusts appear to be suffering from a similar problem with large discounts commonplace. A higher interest rate environment isn’t helping as most borrow to buy their assets.
Specifically to SDCL, the renewable energy sector’s also facing some challenges. Some prominent projects in the UK have been cancelled due to uncertainty over the level of future returns.
Whatever the reasons, the trust has said it remains “frustrated” and that the “status quo is clearly unsustainable”. The directors are “considering all strategic options to deliver value for all shareholders in an effective and efficient manner”.
This could mean a delisting, share buybacks or the acquisition of another trust. In recent months, there’s been a trend among investment trusts to merge funds.
But trusts are a great way of spreading risk. For example, having a stake in SDCL means owning a proportion of over 50 businesses.
My view
Although I’m attracted by the generous yield, I can’t help but feel nervous about the falling share price. There’s little point banking generous dividends if the capital value of the underlying asset is being slowly eroded. Having said that, I don’t think SDCL’s done too much wrong.
It certainly seems to be in the right sector to me. The transition towards renewable energy is, in my opinion, irreversible. The only doubt is the timescale. Therefore, long-term, it should do well.
And it looks as though things may have stabilised. Over the past six months, the trust’s share price has risen 6%. Okay, this isn’t an amazing performance but at least it’s stopped falling.
Therefore, on balance, it may not be ‘the best’ but I think it’s a stock for income investors to consider buying. However, they should be mindful of the possible short-term risks to their capital.
