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Dividend stocks: why I invested in Greencoat UK Wind and its 5% yield!

Windmills for electric power production.
Image source: Getty Images

Dividend stocks form a considerable part of my portfolio. These stocks provide me with a regular, albeit not guaranteed, income and this allows me to pursue a compound returns strategy.

I’m always on the lookout for dividend stocks to add to my portfolio as long as they meet my criteria. One stock I recently purchased was Greencoat UK Wind (LSE:UKW). So let’s take a look at why I think this stock is a positive addition to my portfolio.

What is Greencoat UK Wind?

Greencoat UK Wind is a closed-ended investment company, aiming to provide investors with an annual dividend that increases in line with retail price index inflation while preserving the capital value of its investment.

The firm, as the name suggests, invests in wind farms in the UK. These farms generate clean electricity, which is sold to energy suppliers to power people’s homes.

Greencoat has 45 wind farm investments across England, Scotland, Wales and Northern Ireland with an aggregate net capacity of 1,289.8 megawatts.

This includes the recent purchase of a 12.5% stake in Hornsea 1 — the world’s largest offshore wind far — as well as smaller investments such as in Windy Rig, Scotland, which consists of just 12 turbines.

The trust’s holdings produce enough energy to power over 1.5 million homes.

Valuation

The stock is currently trading at a 2.6% discount versus its net asset value. That’s not massive, but it’s always nice to know you’re not paying a premium.

Greencoat also trades with a price-to-earnings ratio of just seven, which is clearly positive for a firm operating in an expanding and highly-promising market. It also offers a dividend yield of 5% — that’s higher than 75% of dividend-paying stocks.

Here’s why I bought…

The valuation is clearly rather attractive, and so is the dividend yield. But there are further considerations.

Firstly, the near-term prospects are positive. Electricity prices have gone sky high and, unsurprisingly, it’s provided immense financial flexibility. The firm removed around £50m of debt last year and used additional capital to invest in Hornsea 1.

I’m also pretty bullish on energy prices going forward as I’m forecasting a decade of intense competition for resources, and that will translate to higher electricity prices.

In fact, even the weather has been propelling Greencoat forward in recent weeks. Last Tuesday, wind provided more than half of the UK’s power, setting a new record, according to RenewableUK. The blustery weather over the past month has meant that 82.5% of Britain’s electricity since Christmas was provided by low carbon sources.

Greencoat could also receive a boost from the government if reports are to be believed. It’s understood that the government will drop its rather ludicrous ban on new onshore wind farms due to pressure from Conservative MPs.

However, it’s worth remembering that there are risks with any investment. For one, there’s still roughly £900m of loan obligations on Greencoat’s books, and that could act as a drag on profitability going forward. And, naturally, it’s worth highlighting that you can’t produce wind energy without wind. We’re a windy isle, but occasionally, wind will struggle to meet demand.

The post Dividend stocks: why I invested in Greencoat UK Wind and its 5% yield! appeared first on The Motley Fool UK.

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James Fox has positions in Greencoat UK Wind Plc. The Motley Fool UK has recommended Greencoat Uk Wind Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2023