Stock market

My goal is an annual second income of £34k with high yielding dividend stocks.

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There are several strategies when it comes to investing for second income. Some aim for a slow but reliable gain over a long period of time. Others aim for higher returns from undervalued stocks with growth potential.

I think buying high yielding stocks and reinvesting to compound the gains is a good strategy. But while some of the highest yields go up to 15% or more, they’re not necessarily reliable. It is best to choose stocks with a long track record of paying and increasing yields.

There is a good example. Greencoat UK Wind (LSE:UKW) , a FTSE 250 A real estate investment trust (REIT) that invests in the renewable energy sector. REITs provide a 20% tax deduction benefit for individual shareholders.

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 is it intended to be, any form of tax advice.

Harnessing wind power

Greencoat UK Wind Specializes in offshore and offshore wind farms. With renewable energy set to reach a goal of tripling capacity by 2030, demand for wind power should remain high. The company’s assets already supply 10MW of electricity to UK homes and last month it signed a 10-year Power Purchase Agreement (PPA) for its Ballybean Phase 1 wind farm.

With a dividend yield of 7.5%, it is double the FTSE 250 average yield of 3.23%. It has been paying dividends consistently for over 10 years, mostly between 5% and 6% during that time. However, the share price of £1.35 has not changed much over five years, apart from a brief rise during 2022. But that wouldn’t worry me too much. This is quite typical of income shares, which focus on providing returns through dividends.

Financial and Risks

While the trust’s profits are stable and reliable, revenues and earnings are declining. Estimates suggest it may turn unprofitable next year. Its price-to-earnings (P/E) ratio is now 25 times, with the share price rising capital. This is much higher than the industry average of 16.8.

It also means that earnings per share (EPS) have risen to 5.5p – well below the current 13.7p dividend. As a result, production may be lower later this year or next year. However, based on the past 10-year track record, payouts should remain consistent.

The bottom line

Greencoat UK Wind has a solid balance sheet that appears stable enough to handle a period of losses. Its debt of £1.8bn is well covered by equity and assets significantly exceed liabilities. It has a debt-to-equity (D/E) ratio of 47% and an interest coverage of 3.1 times.

With strong industry growth and an exceptional track record, I am confident that the trust will continue to pay reliable dividends indefinitely. And I’m not alone. On May 22, Barclays Put an overweight position on the stock, indicating that the stock will outperform its sector average over the next eight to 12 months.

As such, I think it will add a lot to a dividend portfolio aimed at creating a second income stream. If I invested £20,000 in a portfolio with an average yield of 7% and 2% annual value growth, it could grow to around £400,000 over 30 years. It’s not guaranteed, but this amount will pay a second income of £34,500 per year in dividends.

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