Stock market

To buy? This 7.3% dividend yield is an excellent long-term income stream.

Image source: Getty Images

Earning a high dividend yield can be a much superior way to acquire a second income stream than buying. The latter is undoubtedly a viable strategy. But it requires a lot of effort and attention.

After all, buying a rental property requires an investor to become a landlord who takes on the task of finding a tenant, collecting rent, paying for repairs, as well as buying a mortgage – which is quite expensive at the moment. Is.

Alternatively, all of this can be handed over to a team of professionals at a very low cost, thanks to real estate investment trusts (REITs). These businesses are publicly traded like any other stock. And by owning them for a long time, shareholders can enjoy a steady stream of high-yield dividends without going into debt.

Looking at my own portfolio, Greencoat UK Wind(LSE:UKW) is a great example of what I believe is a fantastic and reliable source of income. Here’s why.

The Dividend Aristocrat of the Future?

There are many different types of REITs. Some focus on debt markets by buying mortgages from the private sector and collecting interest payments. But most focus on equity, investing in properties and collecting rents. Greencoat is an example of the latter. However, rather than buying car parks, office buildings or warehouses, the firm specializes in wind farms. In fact, it is the largest owner of publicly traded wind farms in the UK.

The turbines generate electricity that is sold to the energy grid, generating a rent-like revenue stream that is used to fund the 7.3 percent dividend yield. As business models go, it’s pretty straightforward. But the focus on renewable energy is what makes GreenCoat so promising.

Barriers to entry for energy infrastructure are much higher than for residential or commercial property. At the same time, demand for clean electricity is skyrocketing as cars and homes electrify.

This trend is unlikely to change for decades. And it serves as a powerful tailwind for this enterprise to leverage. In fact, Greencoat already appears to be doing just that. Continuous cash flow expansion has translated into nine consecutive years of dividend increases at an average growth rate of 8.7%. In other words, the company is on its way to becoming a dividend aristocrat.

Every business has its weaknesses.

The revenue generating potential of this enterprise is evident. However, as with all investments, there are always risks. And Greencoat is no exception.

Operating in the energy sector, the Company is subject to the same regulations as other energy businesses. This includes price caps applied by regulator Ofgem. And with electricity prices determined by the market, Greencoat ultimately has no pricing power.

Comparatively, turbines do not require much maintenance and rarely break down. But regular inspections are required, leaving the company with essentially fixed costs. This is a bit of a double-edged sword. When electricity prices are high, Greencoat’s profit margins can reach extraordinary heights. In fact, in 2022, the operating margin reaches almost 95%!

Today, energy prices have come down, taking the group’s margins to 83%. It’s still nothing to joke about. But it does show how sensitive GreenCoat is to energy prices. If they continue to fall, margins will follow, pressuring profits.

Nevertheless, with an excellent track record of energy price volatility, I feel this risk is worth taking for my portfolio.

Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button