Thematic choices

A theme that’s fallen out of favour in the past couple of years is renewable energy. For a start, interest rates staying higher haven’t helped. Typically, projects like wind and solar farms are capital intensive and require debt financing. The project’s value is often based on expected cash flows decades out. As a result, when people worry that interest rates will remain elevated, the higher interest costs make the businesses less attractive.

However, continued interest rate cuts this year mean that I don’t think this will become a problem anymore. Further, structural demand for renewable energy is going to increase. Data centres and AI are driving a massive increase in power demand. These factors lead me to conclude that related stocks could again generate significant interest in the coming year.

The bonus for income investors is that some of these shares are geared towards paying dividends. For example, companies such as Greencoat UK Wind (10.63%), Renewables Infrastructure Group (11.02%) and Bluefield Solar Income (11.61%) all fit into this category. The current dividend yields are shown in brackets.

The depressed share prices have acted to push up the dividend yield. Even though this is a risk to note, if my future outlook proves to be correct, now could be a good time to consider investing.

Yield enhancement option

A different stock I like at the moment is Volta Finance (LSE:VTA). The business aims to generate profit by buying structured finance assets. In simple language, it buys debt and asset-backed loans, along with similar-style products. As a result, it makes money from the interest on the loans, which is typically at a high rate due to the unusual nature of the loans.

This is one factor why the dividend yield’s high at 9.31% right now. Over the past year, the share price is up a modest 5%. Looking ahead, I’m confident the management team can continue to pick attractive investment opportunities. The risk of default is there however, in the latest annual report.

It said: “We are pleased to report that credit losses and defaults continue to be extremely low – perhaps more so than many might expect given the current geopolitical turbulence”. It pointed to the manager’s skill in the selection process as helping to reduce this risk.

One concern is that Volta’s involved in complex financial instruments. Even with the smartest investor, there’s the risk that something blows up and goes badly wrong, causing a sharp share price fall.

However, with a dividend cover ratio of 1.4, I don’t think the dividend is under any immediate threat. Therefore, alongside the other options, I think it could be a high-yield option to consider.

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