A sustainable payer

I’m talking about Foresight Environmental Infrastructure (LSE:FGEN). The stock’s down 3% in the past year but boasts a dividend yield of 11.08%.

The company’s an investment trust that owns a portfolio of real-world assets. This includes things like solar farms, wind projects and waste processing facilities. In terms of generating revenue, these are cash-generating assets tied to long-term contracts and essential services like electricity and resource management.

Importantly, a good chunk of the assets is backed by government contracts. This should provide investors (particularly those looking for reliable income) with some confidence, as it’s unlikely the government will default on any existing deals.

In terms of the outlook, I think the world’s starting to turn back to renewables, given the fragility shown in global markets by the conflict in Iran. I believe a greater focus will be placed on alternative energy sources this year, which should translate into more business opportunities for the trust.

Dividend interest

Let’s move to one of the most attractive elements of the stock, the dividend. It isn’t just paying income, it’s growing it. The trust’s targeting a dividend per share of 7.96p for this year, marking its 11th consecutive annual increase.

Even more importantly, that dividend looks well covered. The company has a dividend cover of 1.1, meaning the trust generates more cash than it pays out. In other words, it isn’t scraping the barrel to fund those payouts, which is another good sign for dividend hunters. The income’s backed by strong operational cash flow, which covered dividends by 1.32x in the latest full year.

If someone invests £2k now, they could expect to receive dividends later this year. Assuming the income was reinvested, it can help to compound the growth of the portfolio. If this were kept up over time, by year 15, it could be generating £1,092 for that year. That assumes no additional money’s invested.

Some might think this is too long to wait. In that case, adding an additional £150 a month helps speed things up. In this case, by year four, the portfolio could pay out £1,361.

Risk and reward

Of course, there are risks involved. Given the likely rise in inflation from the energy price spike, interest rates in the UK could rise later this year. As the business funds a chunk of any new project via debt, higher interest rates will increase costs and could weigh on profits.

Even with this concern, I still think the stock’s worthy of consideration by income investors.

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Still, look again. The top-yielding share in either index is FTSE 250 member SDCL Efficiency Income Trust, offering 12.7%.

Hot on its heels are Bluefield Solar Income Fund (12.4%), The Renewables Infrastructure Group (11%), Foresight Environmental Infrastructure (LSE: FGEN), yielding 10.9%, and Greencoat UK Wind (10.6%).

That’s right. The top handful of shares in either of the UK’s two biggest indexes all yield well over 10%.

Notice anything else? All five are involved in renewable energy. What on earth’s going on?

A change in the air

Basically there’s been a shift when it comes to how policy makers are treating renewable energy.

A few years back, the mood was gung ho. Governments across Europe were busy making commitments to renewable energy. The investment environment for wind farms, solar panels, and more looked promising.

But the wind’s changed (always a risk in this line of business!) Now the economics of these activities rely on different pricing and subsidy assumptions than before. Shares have been marked down accordingly – but has that been overdone?

Could this be the sort of situation when market overreaction, combined with uncertainty about the long-term outlook, means patient investors actually have a chance to snag a possible bargain – and earn lucrative dividends along the way?

Can things continue like this?

Take Foresight Environmental Infrastructure.

A 12.8% dividend yield is far from normal. That may suggest that its future is in doubt.

But the dividend per share has been raised this year, as it has consistently on an annual basis over recent years. Past performance is not necessarily a guide to what may happen next but the steady dividend growth could be seen as a statement of confidence by management.

The investment trust is also selling at a 31% discount to its net asset value, further suggesting some investors are shunning it.

Can this go on? Possibly, but sooner or later, if the share price does not come closer in line with the underlying asset value, there could be shareholder pressure to break up the company to try and realise the value of the assets.

For now, a juicy dividend might mean some shareholders are content to sit and wait, ignoring the discount. But a 37% share price drop over the past five years is not pretty.

The dividends remain covered by operating cash flows.

Management said at the half-year point it is “confident in our portfolio’s combined ability to deliver long-term predictable income for investors alongside attractive upside potential from our growth assets”. It also expressed ongoing optimism about the long-term trends underpinning the green economy.

Investors have been spooked that changing economics of renewable energy could hurt both profits and asset values in the sector, driving down cash flows. That could lead to dividend cuts in the sector, hence the high yelds of some exposed UK shares.

I definitely see that as a risk, but I think it is already factored in to the Foresight Environmental Infrastructure price. I see it as a share for investors to consider.

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As I write, the FTSE 250 boasts 46 stocks with at least a 6% yield, 28 stocks with a 7% yield, and 12 stocks with a a 9% yield. These might not all be household names, but they might be worth a look. Let’s meet three of the biggest payers.

Three picks

The first big yielder is investment group Aberdeen (recently abandoning its former moniker of ‘abrdn’). The firm is one of the biggest companies on the index, having dropped down from the FTSE 100 not so long ago. The stock boasts a 7.3% dividend yield and has remained above the 6% mark for most of the last decade.

A second FTSE 250 dividend stock to look at is Harbour Energy. The oil and gas firm has operations across the globe but is centred around the North Sea. Its 8.43% dividend yield is a good sight higher than its FTSE 100 counterparts of Shell and BP. The yield has been above 7% since the 2022 merger that created it.

The third stock that caught my eye is Foresight Environmental Infrastructure (LSE: FGEN). At a £400m market cap, the investment trust is one of the smallest companies on the FTSE 250. Its dividend yield, by contrast, is the highest at a whopping 12.21%. Looking at the last 10 years of yields, a figure of 6%-7% is closer to a long-term average however.

A bargain?

It’s the final one that intrigues me most out of the three. The gargantuan dividend is attractive of course at over three times the FTSE 100 average. It’s well covered by last year’s earnings and there are no plans for a rebase or cut on that huge yield.

The reason the yield has rocketed is because of a falling share price. At 64p a share, the shares are going at a 52% discount compared to a previous high. The reason for the drop is largely down to interest rates which aren’t fallng as fast as expected. The green energy investments it deals in are cheaper when rates and therefore borrowing is lower.

The most striking detail is a mammoth discount on ‘Net Asset Value’ or NAV. The NAV is like the worth of all its assets. If a firm’s share price is cheaper than the equivalent of its assets (per share) then it has a discount on NAV.

This isn’t uncommon in investment funds where it’s not easy to judge the value of assets. But what is strange is the huge 40% discount on NAV that Foresight Environmental Infrastructure has at the moment. That could be a sign that there is great value here. I’d say it’s one to think about.

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However, there are always exceptions to this rule. And by successfully identifying businesses that most investors are underestimating, some enormous passive income streams can be unlocked. That’s what’s brought Foresight Environmental Infrastructure (LSE:FGEN) onto my radar.

With a share price of around 68.3p, a single £500 lump sum is enough to buy approximately 732 shares today. And with a yield of 11.5% on offer, the renewable energy trust currently offers the biggest payout in the entire FTSE 350.

So, is this a trap or a hidden opportunity?

The bear case

Let’s start with why investors don’t seem to be very optimistic that Foresight’s current dividend can be maintained.

Beyond the general weak sentiment surrounding renewable energy companies right now, there are valid reasons to be concerned about dividend sustainability. For example, Foresight’s balance sheet does carry a significant chunk of debt, putting pressure on the group’s cash flow.

This pressure is slowly being alleviated through refinancing efforts alongside gradual interest rate cuts from central banks across the UK and Europe. Yet rate cuts are proving slower than initially expected. And with the bubbling political environment across Europe, renewable energy policies could be at risk of disruption in the coming years.

For Foresight, that could prove disastrous since a large portion of its revenue is tied to government subsidies. And when combining these political, macroeconomic, and financial risks, it’s not surprising that investors are reluctant to add this income stock to their portfolios.

The bull case

While the risks and threats are substantial, these come paired with some pretty significant positives that may be ignored right now.

Foresight’s project portfolio is fairly broad, preventing any single-asset concentration risk while also exposing the business to multiple niches within the renewable infrastructure space. At the same time, the structure of most of its contracts includes inflation-linking, protecting the business and — in turn –shareholders from rising costs.

As such, even with a long history of having a high dividend yield, shareholder payouts have continued to grow each and every year for the last decade. And looking at its latest results, the group’s cash flows continue to cover dividends by around 1.3 times. That’s still tight but not disastrous and suggests that a payout cut is not imminent.

The bottom line

Despite being in the double-digits, Foresight’s dividend yield currently looks sustainable. Providing that energy prices don’t suddenly plummet or subsidies are cut, the group’s coverage ratio could expand further, securing dividends and potentially attracting investors back into this space.

Political pressure from UK and European parties seeking to redistribute funds towards nuclear projects is a problematic medium-term threat. But cuts to subsidies are far from guaranteed. And a good chunk of this risk seems to already be baked into the weakened share price.

That’s why I think this income stock is worth a closer look for investors who don’t mind taking on a bit of risk.

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As its name suggests, this UK-based investment trust focuses on managing a diversified portfolio of environmental infrastructure assets across Europe. That includes projects like renewable energy, waste-to-energy, and biomass energy solutions.

With the growing need for clean electricity, the business has enjoyed fairly predictable and consistent inflation-resistant cash flows. And subsequently, despite the recent weakness in its share price, investors have reaped 10 years of consecutive dividend hikes.

So, with such a high yield on offer, should income investors go against the crowd and capitalise on this seemingly lucrative source of passive income?

The challenge of interest rates

Investing in the development of renewable energy infrastructure is not cheap. And when interest rates were near 0% in the past, Foresight had little trouble raising affordable capital. But this debt-heavy strategy has backfired following the resurgence of inflation in 2022.

With central banks hiking interest rates, the leveraged balance sheets of renewable energy trusts became enormous liabilities. And in many cases, it forced asset sales at depressed prices to prevent insolvency.

Today, interest rates are slowly coming back down. Nevertheless, they remain elevated. And when combined with sector-specific construction delays, higher input costs, and long-term energy price downgrades, Foresight remains shrouded in uncertainty.

A hidden opportunity?

To management’s credit, the group’s debt exposure is being tackled. Gearing landed at 28.7% in its latest financial results, down from around 36% in 2021. And further debt reduction efforts are under way.

What’s more, while investor sentiment surrounding renewables remains weak, that doesn’t change the fact that most of Foresight’s energy contracts are inflation-linked.

In turn, so are dividends. And with management having a fairly strong track record of deploying capital, the company could be in a strong recovery position once further interest rate cuts reinvigorate investor appetite in this sector.

Of course, there’s no way of knowing exactly when the tide will change. Inflation is proving annoyingly stubborn. And we’ve already seen the Bank of England delay rate cuts as a result.

For long-term investors with the patience to wait, that may not seem like a problem. Sadly, that’s not the case. With upcoming debt maturities, Foresight will likely begin refinancing its loans. And if interest rates are still elevated, the group’s average cost of debt could rise significantly, putting pressure on its cash flow as well as dividends.

This is one of the main reasons why the shares are trading at a steep discount to net asset value and why investors are seemingly reluctant to jump on the double-digit yield.

The bottom line

The combination of macroeconomic, operational, and sector-specific risks surrounding this business certainly explains why investor sentiment is weak. Yet with all these risks already seemingly baked into its share price, the yield is tempting in my mind.

There’s no denying investors will need patience. But if Foresight is able to successfully navigate through the current challenging market environment, the long-term rewards could open the door to phenomenal passive income. That’s why I’m taking a much closer contrarian look at this FTSE 250 enterprise.

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There are risks involved, but if an investor targeted just the stocks with the most significant yield, here’s what the portfolio could look like.

Balancing risk and reward

I’m going to filter for options just in the FTSE 250. For reference, the average index yield’s 3.49%. Foresight Environmental Infrastructure (LSE:FGEN) has the highest yield at 11.58%. Yet I doubt anyone would put all their money in just one idea. Rather, to benefit from diversification, it makes sense to include at least the top half dozen companies.

We’re already dealing with stocks with a higher risk than normal, given the elevated yields. Holding several shares means that if the yield on one share gets cut, the overall impact on the portfolio can be managed.

With that in mind, a portfolio could include not just Foresight but also the SDCL Efficiency Income Trust, the Foresight Solar Fund, the Bluefield Solar Income Fund, Energean and Harbour Energy. The average yield from this group of top income shares would be 10.71%!

Therefore, let’s say an investor put £100 a month in each of these stocks for five years. In year six, without any further capital inflows, they could make £483 a month just from the dividend payments.

Digging a little deeper

Let’s run through Foresight Environmental Infrastructure in a little more detail. Its mandate is to build a diversified portfolio of environmental infrastructure assets (hence the name) that offer long-term, inflation-linked cash flows. As a result, the goal is to provide shareholders with a sustainable, progressive dividend. At the same time, it tries to preserve capital in real terms over the long run.

Despite this aim, the yield in excess of 11% is still high. One factor is due to the 22% share price fall in the past year. There’s no one single factor for this, but rather several worth flagging. For example, lower power prices and volatility in energy markets have put pressure on revenue. Added to this is a number of portfolio assets that have underperformed expectations recently.

However, I don’t see an immediate threat to the dividend. Earlier this summer, the board reaffirmed its commitment to the dividend as it looks to simplify the current portfolio and wind down assets that are less aligned with its stable cash flow focus. I think this is a wise move and should help both the share price and the dividend in the long run.

It’s true that there are risks. The recent asset issues (maintenance cost overruns, underperformance of wind and some outages) show the vulnerability of revenue to physical and weather risks.

Yet if investors can diversify single-stock risk by holding other high-yielding stocks, it can be a strategy worth considering.

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Individuals can choose to diversify themselves by building a customised portfolio of separate shares. However, this can create much more legwork and greater costs than buying a trust that does the hard work on investors’ behalf.

In addition, some assets that these investment trusts hold can’t be purchased in popular products like the Stocks and Shares ISA or Self-Invested Personal Pension (SIPP).

With this in mind, here are three high-yielding trusts to consider. As you’ll see, their prospective dividend yields soar above the FTSE 100 historical average of 3-4%.

Latin fever

At 5.7%, the BlackRock Latin American Investment Trust (LSE:BRLA) has the smallest dividend yield among this selection. But the potential for healthy long-term capital gains and passive income means it still merits serious attention.

In the past decade, it’s delivered an average total annual return of 7.9%. The trust provides exposure to 35 companies in total, which are as varied as iron ore producer Vale, railway operator Rumo and financial services provider Banorte.

This BlackRock trust portfolio spans much of Latin America, though the overwhelming majority (92%) of its holdings are in Brazil and Mexico.

This large weighting towards just two countries creates added regional risk. But focusing on Latin America’s richest and most populous nations also carries greater growth potential over time.

Going green

The Foresight Environmental Infrastructure (LSE:FGEN) trust’s designed to “support the drive towards decarbonisation, resource efficiency and environmental sustainability“.

This allows it to provide strong returns as governments and businesses step up to fight climate change. For this financial year, its dividend yield’s a FTSE 100-smashing 10.7%.

This investment trusts holds a portfolio of 41 assets, and its expertise extends far and wide. It provides wind and solar power, generates biomethane from waste products, and operates natural gas refuelling stations for trucks. This means it’s not dependent on a single technology, which can smooth returns across different market conditions.

Bear in mind though, that changes to electricity contracts could impact returns over the short term.

Residential hero

The trusts I’ve described have excellent records of dividend delivery. But they’re not obligated to pay a minimum amount out in profits to shareholders, which can make passive income levels more unpredictable for investors.

Real estate investment trusts (REITs) like Social Housing REIT (LSE:SOHO), on the other hand, tend to provide superior visibility. Under sector rules, a minimum of 90% of annual earnings from their rental operations must be paid in dividends. This is the price they pay for juicy tax breaks.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

I like this particular REIT because its defensive operations offer even more security to investors. It specialises in providing accommodation for adults with special care needs, demand for which is unaffected by broader economic conditions.

Social Housing’s forward dividend yield’s a huge 8.6%. I think it’s worth considering, despite the impact that interest rate movements can have on its property values.

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Following recent stock market volatility, investors have an excellent chance to make a market-beating passive income this year. Dividend yields across the London Stock Exchange have shot higher, and many top shares now offer yields miles above the 3.6% average for FTSE 100 shares.

2 top dividend shares

With this in mind, here are two of my favourites to consider in May.

While dividends are never guaranteed, here’s why I think these passive income stocks merit a close look.

Green machine

Despite recent pushbacks against the ‘green agenda,’ companies that produce renewable energy, promote sustainability and champion resource efficiency still have tremendous investment potential, in my book. Foresight Environmental Infrastructure is an investment trust whose broad operations support the long-term fight against climate change.

The company owns more than 40 assets in the UK and Mainland Europe. These range from Scottish wind farms and energy-from-waste plants in Italy, to battery storage projects and wastewater facilities in England.

What’s more, the company’s portfolio is diversified intelligently across these assets types. This provides resilience when, for example, cloudy weather conditions impact power generation from its solar assets. Dividends here have risen each year since 2011, underlining the stability that its operations provide.

For 2025, the predicted dividend is covered 1.2 times by operational cash flow, providing a decent margin of error. I think it’s a top defensive dividend share to consider, even though earnings could be impacted by rising inflation that pushes interest rates higher.

Sun king

NextEnergy Solar Fund is another renewable energy stock I feel is worth close look. With a dividend yield above 12%, it’s one of the highest yielding dividend shares across the whole London stock market.

Unlike Foresight Environmental Infrastructure, its operations aren’t divided across a wide range of technologies. As its name implies, the lion’s share of its portfolio is dedicated to solar farms (it currently has 101 operating projects on its books). Meanwhile, its energy storage asset base comprises of just one operating site.

While this creates greater risk, this isn’t to say that NextEnergy Solar isn’t still well diversified. Its UK farms cover the length and breadth of the country. It also owns solar projects in Italy, Spain and Portugal.

Dividends here have risen each year for around a decade, and it has returned around £346m in cash rewards since its IPO in 2014. With a strong balance sheet — it’s also undertaking share buybacks of up to £20m — I’m expecting the fund to remain a great dividend payer.

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As you’ll see, their forward dividend yields sail past the UK blue-chip average.

Foresight Environmental Infrastructure

Investing in utilities can be an effective strategy when broader economic times are challenging.

Sure, earnings can be impacted by higher interest rates. But on the whole, the essential commodities they provide to homes and businesses — whether that be water, gas, or electricity — can provide excellent profits stability.

This is an essential quality that gives utility companies financial means and the confidence to consistently pay a decent dividend.

Investors have a huge range of utilities shares and related investment vehicles to choose from today. One investment trust I like is Foresight Environmental Infrastructure (LSE:FGEN), whose forward dividend yield is a gigantic 10.9%.

This company has its finger in many pies when it comes to harnessing the growing green economy. It owns wind and solar farms, hydro plants, waste management sites, and biomass projects, to name just a handful of asset categories it’s involved with.

In total, it owns 41 projects spanning Europe. It’s a range that provides added protection for investors, as localised issues like adverse weather conditions and regulatory changes can be effectively absorbed, safeguarding earnings and dividends.

Renewable energy trusts like this also have considerable long-term growth potential as the world steadily switches away from fossil fuels. Dividends here have risen every year since it listed on the London stock market in 2014. It’s a run I expect to continue.

Schroder European Real Estate Investment Trust

Schroder European Real Estate Investment Trust (LSE:SERE) is another investment trust I think’s worthy of attention from dividend chasers. Its classification as a real estate investment trust (REIT) means at least 90% of annual rental earnings are guaranteed to be paid out to shareholders.

Furthermore, at 7.9%, its forward dividend yield is more than double the FTSE 100 average.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

As the name suggests, this trust focuses on Europe and holds a diversified portfolio of properties. These include food and DIY retailers, warehouses, logistics hubs, and office space. And they are based in so-called “winning cities” (including Paris, Berlin, and Hamburg) that have substantial long-term growth potential.

Theoretically, the trust’s focus on cyclical sectors could leave earnings more vulnerable to turbulence during economic downturns. However, with around 50 tenants, it effectively minimises rent collection and occupancy issues at the group level.

I also like Schroder European Real Estate Investment Trust because of its strong balance sheet. With a loan to value of just 25%, it has substantial flexibility to continue paying a large dividend even if profits disappoint in the near term.

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Earlier this week, I searched the FTSE 250 index (the largest 250 companies on the London Stock Exchange outside the FTSE 100) for high yielders. Here’s what I found.

A stack of high-yielders

According to my data provider, there are currently 25 stocks within the FTSE 250 with forward-looking dividend yields of 7% and higher. Of these, 15 have yields of 8% and higher.

Now, not all of these stocks are likely to be good investments in the long run, of course. Often, high yielders turn out to be poor investments overall (a high yield can be a signal that a company has fundamental problems).

But there are certainly a few that look interesting to me.

A play on the UK’s ageing population

One is Target Healthcare REIT (LSE: THRL). It’s a real estate investment trust (REIT) that owns a portfolio of care homes across the UK.

Currently, analysts expect it to pay out total dividends of 5.7p per share for 2024. That translates to a yield of around 7.1% today.

Looking at demographic projections, this stock could almost be considered a ‘no-brainer’, in my view. In the UK, the number of people aged 85 and over is projected to rise 8% in the next five years and 63% by 2043, according to Age UK. This means that demand for care homes should be very high in the years and decades ahead.

Of course, commercial property’s facing challenges right now due to high interest rates (this can be seen in the share price). If rates stay higher for longer, they could put pressure on profitability across the sector.

With rates in the UK likely to come down in the second half of 2024, however, I think this stock is worth a closer look right now. I reckon it has the potential to deliver both gains and passive income in the years ahead.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

A stock for the green revolution

Another high yielder that looks interesting to me is JLEN Environmental Assets Group (LSE: JLEN). It’s an environmental infrastructure investment fund that owns a diversified portfolio of assets supporting the drive towards decarbonisation, resource efficiency, and environmental sustainability.

It recently told investors that it expects to pay out 7.57p per share in dividends this year. That equates to a yield of 8.6% at the current share price.

Like Target Healthcare, JLEN Environmental Assets has a very favourable backdrop. In the years ahead, looking after the environment is only likely to become more of a focus.

What I like about this company is that it’s really diversified. Its portfolio today includes onshore wind farms, solar plants, waste and wastewater processing plants, hydro and anaerobic digestion plants, battery storage, hydro projects, and more.

One risk here (and this is also a risk for Target Healthcare) is that the company may decide to raise money from investors to support its growth plans. This could put pressure on its share price in the short term.

Taking a long-term view however, I think this stock has the potential to deliver attractive returns.

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