Many dividend stocks are currently offering elevated yields. However, few are actually ahead of today’s inflation rate. Even with the devaluation of money slowing considerably since the start of 2023, inflation is proving suborn at 6.7%.
There are obviously some income stocks offering a higher yield. But venturing too far into this territory could land investors in several traps that end up doing a lot of damage. However, just because the payout level on a stock isn’t ahead of inflation doesn’t mean it can’t keep up in the long run.
Two examples of this would be Greencoat UK Wind (LSE:UKW) and Foresight Solar Fund (LSE:FSFL). These renewable energy stocks currently offer a yield of 6.2% and 8.6% respectively.
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Those are already handsome payouts. But something more interesting is revealed when taking a closer look at the dividend policies. Both payouts are inflation-linked. In other words, providing the cash flow keeps coming, the income generated is protected from inflation.
Investing in renewables
With the effects of climate change becoming increasingly apparent, Western governments have begun pushing harder to transition away from fossil fuels. The UK, in particular, has made solid progress over the last decade, with renewables now generating over 36% of the Nation’s energy in the last 12 months.
This push is accelerating the tailwinds firms like Greencoat and Foresight enjoy. The former specialises in wind power, while the latter is in solar and battery storage. And with the demand for electricity going nowhere, both companies have successfully raised shareholder payouts for eight consecutive years, so far.
With energy prices set to continue rising, this trend doesn’t look like it’s going to reverse anytime soon. And while the new windfall tax levies certainly apply the brakes to profits, it doesn’t appear to have compromised shareholder payouts.
Nothing is guaranteed
Investing in the future of the energy grid may sound foolproof. But, sadly, there’s no such thing as a risk-free investment. And while windfall taxes might not be an issue, the same can’t be said about interest rates.
It’s no secret that building a wind or solar farm isn’t cheap. Even with the price of the technology dropping sharply over the years, establishing a large farm still costs millions. And, subsequently, both firms have racked up a lot of debt over the years.
With interest rates now at their highest point in over a decade, the years of practically free borrowing have come to a close. As such, further expanding asset portfolios could prove far more challenging, not to mention the pressure on earnings from higher interest expenses.
This threat could become even more severe if energy prices start to fall. After all, neither firm has any pricing power over their products, placing them largely at the mercy of regulators such as Ofgem.
The cash-generative nature of these enterprises makes me cautiously optimistic about the long run. Therefore, even with this threat, I’ve already added Greencoat to my income portfolio. And Foresight Solar could be next in line, once I have more capital at hand.
