Stock market

With its 7% dividend yield, I think this undervalued FTSE 250 stock is an opportunity not to be missed.

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With a focus on high yielding dividend stocks FTSE 100I decided to see what was available inside. FTSE 250 Instead

There is a decent amount of mid-cap stocks that not only have high yields but promising growth prospects. Take it ITV, For example. It has a 7% dividend yield and is estimated to be undervalued by 68% based on future cash flow projections. And TPICAPEstimated to be undervalued at 62%, with a 6.8% yield.

I would consider both stocks great additions to a dividend portfolio. But today I’m looking at a different kind of stock. Greencoat UK Wind (LSE:UKW) is a real estate investment trust (REIT) focused on renewable energy.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any tax advice.

Investing in a green future

I think Greencoat UK Wind is one of the best performing dividend stocks on the FTSE 250 at the moment, with an attractive 7.2% yield. This is significantly higher than the 3.4% average found across the rest of the FTSE 250 index. It also has a solid track record, having not gone one without paying consecutive quarterly dividends since 2015.

It might not be a household name yet, but it’s responsible for powering 2.3 million homes in the UK. Operating both onshore and offshore wind farms, it has developed beneficial relationships with fellow UK energy companies. SSE And Centrica. Due to the rapid growth of electric vehicles and households moving away from gas, the demand for electricity is likely to continue to increase. And with the company currently in a dominant position, it looks poised to capitalize on this growth.

Things to think about

While a 7% yield is impressive, there are other things to consider. Like most investment funds, REITs charge management fees so the net cost of production should actually be underestimated. Subtracting Greencoat UK Wind’s 0.9% fee, the return on output is more like 6.3%. This is still almost double the FTSE 250 average.

And while electricity demand is set to increase, caps on energy bills mean companies like this won’t necessarily benefit. Additionally, independent analysts have predicted a decline in revenue and earnings in the coming years, with a recovery likely only in 2026. Earlier this month, the trust released its net asset value (NAV) update for the first quarter of 2024, noting a modest 0.4. % decrease from the beginning of the year. This is due to lower than expected power availability due to outages at its Hornsea 1 facility.

Decision?

I love the potential of renewable energy as it is a new but growing industry that is supported by governments, scientists and researchers around the world. Regardless of one’s personal feelings on climate change, I think this is an industry with a strong future.

Despite the above risks, I believe that Greencoat UK Wind has proven its position as an industry leader through ongoing investment and growth. Furthermore, with liabilities of £5.6bn and total assets of £1.8bn, it has a solid balance sheet that suggests good management. Its £1.8bn of debt is easily offset by £3.8bn of equity, resulting in a debt-to-equity ratio of 47.2%.

These are reassuring figures, which reduce the chances of financial troubles in the near future. As such, I think investors would be wise to consider it for a dividend stock portfolio. I know I definitely will!


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