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There are several strategies when investing to obtain a second income. Some point to slow but reliable gains over a long period. Others aim to earn high returns from undervalued stocks with growth potential.
I think buying stocks with high yields and reinvesting the dividends to increase returns is a good strategy. But while some of the highest yields reach 15% or more, they are not necessarily reliable. It is better to choose stocks with a long history of payments and increasing returns.
A good example is UK Wind Greencoat (LSE: UKW), a FTSE 250 Real estate investment trust (REIT) that invests in the renewable energy sector. REITs offer a 20% tax-deductible benefit for individual shareholders.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice.
Harnessing the power of the wind
UK Wind Greencoat It specializes in onshore and offshore wind farms. With renewable energy on track to reach the goal of tripling its capacity by 2030, demand for wind energy should remain high. The company's assets already supply 10Mw of power to UK homes and last month it signed a new 10-year Power Purchase Agreement (PPA) for its Ballybane 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, during which time it has been mostly between 5% and 6%. However, the £1.35 share price hasn't changed much in five years, apart from a brief rise during 2022. But I wouldn't worry too much about that. It is quite common for income stocks, which focus on providing returns through dividends.
Finance and risks
While the trust's dividends are stable and reliable, profits and income are declining. Projections indicate that it could become unprofitable next year. Since increased investment drives up the stock price, its price-to-earnings (P/E) ratio is now 25 times. That's much higher than the industry average of 16.8.
This also means that earnings per share (EPS) have fallen to 5.5p, well below the current dividend of 13.7p. As a result, performance could decline later this year or next. However, based on the history of the last 10 years, payments should remain consistent.
The bottom line
Greencoat UK Wind has a strong balance sheet that looks stable enough to weather a period of losses. Its £1.8bn debt is well covered by equity and assets significantly exceed liabilities. Its debt-to-equity (D/E) ratio is 47% and interest coverage is 3.1 times.
With strong industry growth and an exceptional track record, I believe the trust will continue to pay reliable dividends into the indefinite future. And I'm not alone. On May 22, Barclays placed an overweight position on the stock, indicating that it believes the stock will outperform the sector average over the next eight to 12 months.
As such, I think it would be a great addition to a dividend portfolio aimed at generating a second source of income. If you invested £20,000 in a portfolio with an average return of 7% and an annual price rise of 2%, it could grow to around £400,000 in 30 years. It's not guaranteed, but that amount would pay a second income of £34,500 in dividends a year.
