Some FTSE 250 stocks are on higher forecast dividend yields than the best in the FTSE 100 these days. NextEnergy Solar Fund (LSE: NESF) is one, topping mid-cap dividends with a cracking 12%.
NextEnergy has lifted its annual dividends every year since floating in 2014. And forecasts show it edging up to 12.3% by 2027.
Future dividends can’t be guaranteed. And the high yield is partly due to a 34% share price fall over the past five years. I can see a few possible reasons for that.
Shifting sentiment
Enthusiasm for alternative energy stocks has worn off in the past couple of years. Did they get a bit too hot in the days when stories of anti-oil protests filled the headlines?
Is it a sentiment shift away from stocks like this in the face of political change? It’s fashionable to support hydrocarbon energy once more. And while NextEnergy has fallen, BP and Shell have climbed back — up 57% and 141% in the same five years.
Do renewable energy firms face genuine new challenges? The US now has a president who appears actively opposed to clean energy. He just blocked work on the Revolution windfarm off the coast of New England, plunging the developer — Danish energy firm Ørsted — into crisis. Wherever we look, governments have been shelving their once-ambitious zero-carbon targets.
It’s surely a combination of all of this.
Contrarian opportunity
Oil investors — including billionaire investor Warren Buffett — were contarians back in 2020. And look how well they’ve done going against market sentiment.
Do those of us who still see long-term profit potential from wind and solar energy — who are clearly now the contrarians — have an attractive buying opportunity today? I think we might.
If we invest in NextEnergy Solar Fund, we need to understand what we’re getting. The company invests in solar power plants and earns revenue from the sale of electricity.
So we, as shareholders, get a stake in what it owns. Right now, NextEnergy shares are selling at a discount to net asset value of an estimated 25%. So we can bag a share of those power assets for 75% of their stated market value.
Bottom line
Assets are one thing, but operational success is another. And June’s full-year results statement was a bit disappointing in one way. It focused mostly on asset values (which all look good to me). And on dividends, with the full-year 8.43p per share up just 1% on the previous year’s 8.35p.
But we saw income fall from £80m the previous year, to £73m. And the company is targeting another 8.43p dividend for the year to March 2026 — no increase for the first time.
I think we could be looking at a few potentially tight years now. And there has to be a danger of a dividend cut in the near-term, regardless of what forecasters say. But I see plenty of room for that while still maintaining a high yield.
For investors with a long-term view who see undervaluation here, I think NextEnergy is definitely worth considering.
