How high a yield is too high?
From a passive income perspective, a juicy dividend yield can be very attractive. On the other hand, it can also be a red flag that investors expect a cut in the payout down the line.
So it grabbed my attention today (26 February) when a UK share that already yields a whopping 11% raised its dividend per share yet again.
Inflation-busting performance
That share is Greencoat UK Wind (LSE: UKW).
Its full-year dividend per share has been increased to 10.35p, making this the twelfth year in a row that it has grown in line with or faster than the Retail Price Index, a common measure of inflation.
As this share sells for pennies, that makes it a high-yield option I think income-focussed investors should consider.
Is there a catch?
But could this be too good to be true?
After all, Greencoat UK Wind’s high yield is far above that of most other FTSE 250 shares.
It also sells at a deep discount to its net asset value (NAV).
Greencoat UK Wind is not alone here. A number of renewable energy focussed FTSE 250 shares have high yields and sell well below their net asset value.
Shifting policy focus when it comes to renewable energy has raised concerns about the long-term profitability of the sector. That could be a risk to profits and therefore the dividend at Greencoat UK Wind.
The company is aware of this. As it said in its results statement, “wider economic and regulatory factors, along with falling NAVs across the sector, have weighed on investor sentiment… The Board and Investment Manager recognise the need to continue to take further action to protect and build shareholder value”.
I see a lot to like here
In reality there is only so much that management can do in the face of such investor sentiment.
Using spare cash to buy back shares at a discount could help create value for shareholders. Last year, Greencoat UK Wind spent £109m buying back its own shares.
The company also reduced its debt principal by £168m, something I see as positive for the investment case.
But while such moves might help unlock some value, I reckon the share price could keep struggling until either there is a wholesale reassessment of the sector by investors, or else someone decides to bid for the company.
That has not happened yet and perhaps never will. Given the discount to NAV, I am sure some potential buyers must have run the numbers on Greencoat UK Wind from time to time.
As a believer in long-term investing, though, I see the depressed share price – down 26% in five years – as an opportunity. Along with steady dividend increases, it has helped push the yield up.
The company spent £227m on dividends last year but still ended the year with more cash than when it began. With its high yield, I see this as share for investors who want to try and build passive income streams to consider.
