How we’ll power our inflation-linked dividend

In the second part of our video interview with Greencoat UK Wind (LSE:UKW), manager Matt Ridley runs through the sustainability of its dividend, with the trust delivering inflation-linked income for 12 successive years.

Ridley details its dividend cover, including addressing a criticism over how it is calculated. Other topics include the trust’s discount, and Ridley explains how he’s fully aligned with shareholders due to how the management fees are based on the performance of the share price.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to our latest Insider Interview. Today in the studio, I have with me Matt Ridley, fund manager of Greencoat UK Wind. Matt, thanks for coming in today.

Matt Ridley, manager of Greencoat UK Wind: Thanks for having us, Kyle.

Kyle Caldwell: Greencoat UK Wind is very popular with our customers, which in part I would assume relates to the high dividend yield on offer. You’ve moved your dividend increases down from RPI to CPI recently in line with changes on subsidies, but that is still inflation-linked, which does really stand out.

How are you going to power these dividend increases over time?

Matt Ridley: So, we have readdressed our dividend policy in light of changes that the government made to our principal subsidy instrument.

We felt it was really important for investors to have a really clear signal in terms of dividends from this fund. They’ve had that for 12 years. They’ve had the commitments that the dividend will increase every year in line with RPI, and that’s been delivered, in fact, more than delivered.

We thought going forward, equally our investors would want the clarity, the unrivalled clarity, of having something that’s very clear, that doesn’t hide behind words like ‘progressive’, for example.

So, that commitment is very much central to us as a product. The question then is, how do you fund that? Well, if you look back over our 12-year operating history, on average, the dividends that we’ve paid have been covered 1.7x.

That comes back to having paid £1.4 billion to investors and £1 billion in common reinvested back into new wind farms that, again, create the future cash flows that service the future dividend. And the model going forward is no different.

The forward-looking dividend cover for the next five years that we gave in our presentation this morning is 1.8x. It is that excess cash that gets reinvested that creates new assets that allows the sustainability of the dividend that we’ve committed to.

Kyle Caldwell: The shares have struggled in recent years, but if we see more positive conditions again, how much of the total return would you expect the dividend to make up? Are we going to see much capital growth?

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Matt Ridley: So, yes, again, it comes back to the model that we have in terms of dividend cover, 1.7x in the past, 1.8x going forward. Even with the level of dividend that we have presently, there’s a significant amount of cash looking forward and demonstrated in the past to reinvest that gives you the capital growth.

It’s really the last three years where you’ve seen the net asset value (NAV) of the business decline in line with power prices across the sector. But if you look back at the history beyond that, really, the growth is there because there is excess cash there to reinvest.

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Kyle Caldwell: Could you also address a criticism about how you calculate that dividend cover? You don’t include the amortisation of debt.

Matt Ridley: Of course. The financing structure of UK Wind has been the same since the beginning. We deliberately took a model where we’re going to have a little bit of short-term debt, so a revolving credit facility, you can just draw on it, buy assets, and you can refinance it later. That’s a convenience, it’s very useful.

When we think about the longer-term debt of the business, we do have a bit of debt that’s amortising. About 20% of our debt is amortising. So, that is there. The remaining 70% is in term loans. But they have space to maturities over time, so all the way from now through to 2031. So, we need to refinance that over time. That’s never been a problem. We did a £750 million refinancing in 2024. We’ve refinancing to do this year, which we’re already under way on.

The value of that model is that the excess cash that otherwise would be paying off debt...if you were amortising all the debt, you have no choice, it goes straight off the debt. If you generate the cash instead, then it’s up to you. You can invest it. And if you invest that cash, you can compound it at a much higher rate than the cost of the debt that you were paying, so you can grow the business. And that, in essence, is what we’ve done.

So, we’re very clear about our financing structure, about its merits. We think it’s very low cost, it’s highly flexible. If I woke up tomorrow and decided that we really need to have amortising debt, you could put all that in place too. So, we view it as the right structure for the business, it’s paid dividends over time, and it’s highly flexible going forward.

Kyle Caldwell: Does that criticism come from the fact that all the renewable energy investment trusts, they measure it in a different way? They all measure it the same way and you’re doing it a bit differently?

Matt Ridley: Yeah. It’s just a difference in the financing structure. It’s possible to translate from one to the other, that’s perfectly fine, and I’m not going to criticise our peers. They have the structure they have.

Looking back on it the other way, it is quite easy to guess how much dividend cover would be sacrificed for amortising debt. It’s not a difficult calculus to do. It is even one that we arm our analysts with. They’re just different financing structures and investors can take their choices to which they prefer.

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Kyle Caldwell: There’s a lot of attention on whether renewables trusts can successfully sell down assets in order to reduce debt, and whether they can simply put money into new projects as existing ones age. What’s the story here with Greencoat UK Wind?

Matt Ridley: In the last year, in 2025, really, the last 14 months, we’ve sold £222 million worth of assets all at their prevailing fair market value. We’ve used that capital plus the cash that we organically generate to repay £168 million of debt to buy back £109 million worth of shares. And we’re left over with a small cash balance.

So, the Greencoat UK Wind model works already. We’ve shown that we can sell assets if we want to. If we look at our model going forward, it’s always been a structurally higher dividend cover model. So, disposals can augment the amount of cash that you have to spend, but organically we generate cash every year that we can spend on, for example, reinvestment, which comes back to the £1 billion that we’ve organically generated and put back into the business over time.

So for us, disposals are additive to capital allocation, but not the only capital that we have to allocate.

Kyle Caldwell: There’s a lot of talk about investment trust discounts and Greencoat’s is very wide, although it is narrower than some others in the sector. For those who would like to see that discount narrow, what actions are you and the board taking?

Matt Ridley: Yeah, I mean, it's obvious that there’s a sectoral challenge. There’s too many companies in our sector. I think it grew too big during the time when money was cheap, and I think we need to see a return to health through rationalisation of that sector, so fewer, larger companies. I think only then will you really clear the demand and supply imbalance in the sector.

But that, of course, isn’t something that we can control and just wave a magic wand and make happen. So, what can we do that’s active? We’ve done a number of things. The first was to fully align the fees that the manager receives with the experience of shareholders. So, in this sector, many funds were paid a percentage of the NAV. But of course, the market capitalisation, the share price, was quite disconnected from that.

We were the first to make a change to our fee arrangements. Our fee is now based on the lower of market capitalisation in NAV, which means that as the share price goes down, the experience of the manager is completely aligned with those of shareholders, so alignment is a key principle.

The second thing is to generate and allocate capital wisely, and we’ve just spoken about what we did in 2025, looking forward to 2026, we expect to, again, have more capital organically generated and some more money from disposals and to start to use that to de-gear the business. Buybacks will certainly feature. And we think at some point, while a relatively small amount of what we’ll spend, there’s a disciplined return to reinvestment for the future of the business.

So, really, it comes back to long-term principles, being fully aligned with your shareholders, demonstrating and taking clear action, and, of course, we’ve done that with our dividend policy too. It’s very clear, unrivalled in clarity, it’s out there, and we think that is quite an attractive feature in a market that does have some uncertainties around it.

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Kyle Caldwell: Is there a certain level of commitment in terms of share buybacks, or is it a tool the board can use when they see fit?

Matt Ridley: We’ve spent about £200 million on buybacks to date, starting from October 2023 through to a few weeks ago, [when] the last programme ended. Our immediate priority will be a bit of de-gearing, but buybacks will certainly be a feature given that they are economically additive in the short term.

Kyle Caldwell: Finally, the question we ask all fund manager we interview, do you have skin in the game?

Matt Ridley: It’s always a good question. Yes, is the answer to that, and there’s a number of different layers of the alignment that I have with Greencoat UK Wind. The first is, I’ve already explained, the management fees are based on the share price. So, the manager suffers if the share price goes down. We’re completely aligned with shareholders there and with the board on that.

As a manager, a portion of our fees that we earn every year are paid in shares, and at any given moment, my employer, in which I’m also a holder of equity, has about £6 million worth of shares on the book. I do also have some personal shares in the business. So, be in no doubt, I’m completely economically aligned to the fortunes of Greencoat UK Wind.

Kyle Caldwell: Thank you for your time today.

Matt Ridley: Thank you, Kyle.

Kyle Caldwell: So, that’s it for our latest Insider Interview. For more videos in the series, do hit that subscribe button and hopefully I’ll see you again next time.