Excessive dividend yields are a deal with for earnings traders. And whereas, in lots of instances, an 8.6% payout could be a warning signal, the cash-flow-generating capabilities of Greencoat UK Wind (LSE:UKW) recommend this spectacular dividend stream’s right here to remain. Pairing that with a 20% low cost to web asset worth, this REIT appears like a screaming shopping for alternative.

So is now the time to start out shopping for the shares? Or is there one thing else happening?

Monster dividend yield

Greencoat is probably not a family title. However its portfolio of on- and off-shore wind farms generates the electrical energy for an estimated 2.3 million British houses. That makes it the fifth-largest wind farm proprietor within the nation. And with comparatively low working prices, its enterprise mannequin of producing and promoting clear electrical energy to power suppliers is extremely money generative. A lot in order that traders have loved 9 years of uninterrupted dividend hikes, outpacing inflation.

Right this moment, the story stays largely the identical. Rising demand for renewable power’s proving to be a helpful tailwind, creating new progress alternatives for administration to capitalise on. The truth is, regardless of its depressed valuation, administration’s nonetheless investing in increasing its stake in new and present wind farms, rising income and, extra importantly, money stream.

So if dividends are so safe, why aren’t traders speeding to purchase?

The burden of upper rates of interest

With the majority of extra money flows being returned to shareholders by way of dividends and buybacks, Greencoat’s stability sheet solely has £8m of money handy. By comparability, there’s simply shy of £1.8bn in debt & equal liabilities.

Evidently, it’s a extremely leveraged enterprise. And that’s removed from best, given we’re at the moment working in the next rate of interest setting, including monetary stress and threat to margins. Greater rates of interest even have an hostile impression on wind farm asset values. As such, if Greencoat immediately wants to boost cash, promoting off portfolio belongings will seemingly be executed at a reduction. And the market appears to suppose that the low cost can be round 20%.

There’s no denying the excessive degree of gearing introduces threat. Nevertheless, it’s value stating the agency’s common value of debt is barely 4.68%. That’s fairly near final 12 months’s 4.63%, and because of some current refinancing, there are not any upcoming mortgage maturities till 2026.

That provides the Financial institution of England ample time to chop rates of interest, creating cheaper refinancing alternatives sooner or later, decreasing stress on margins and permitting dividends to proceed rising.

The underside line

A reduced share price limits administration’s skill to boost capital by means of fairness. And since debt’s at the moment quite costly and the market worth of wind belongings is equally depressed, Greencoat’s skill to boost capital’s weakened proper now.

As such, portfolio growth’s more likely to be slower in comparison with earlier years. Nevertheless, as rates of interest drop, the stress from these headwinds additionally falls. Since that’s already began to occur, I feel Greencoat UK Wind’s undoubtedly value a more in-depth search for passive income-seeking traders.