Fancy a high yield? Currently the FTSE 100 yields 2.9%, while the FTSE 250 index of small and medium-sized companies offers 3.4%. So, at first glance, these leading indexes of UK shares might not seem like fertile hunting ground for a high yield lover.
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.
