Interactive Investor

Ian Cowie: this investment trust has a 7.4% yield and a big tailwind

Our columnist explains why a pledge this week by the Labour Party shows the continued direction of travel for a long-term trend that will benefit one of his investment trust holdings.

28th March 2024 09:38

Ian Cowie from interactive investor

It’s an ill wind that blows no good and renewable energy investment trusts stand to gain from wars in Gaza and Ukraine. The explanation is that violent conflict is disrupting the global supply of liquefied natural gas (LNG) and oil, boosting the strategic and market value of the energy self-sufficiency that solar and wind power can provide.

Sad to say, no amount of wishing will make the British Isles as sunny as Spain and so we have to make the most of what environmental energy we have got. That’s why this week the Labour Party leader pledged to invest £8.3 billion building offshore floating wind farms.

Sir Kier Starmer told voters in Holyhead, North Wales: “In an increasingly insecure world, with tyrants using energy as an economic weapon, Britain must take back control of our national energy security.

“Here in Wales, the potential for offshore wind is enormous, and the UK Tory government is squandering it. With public investment we can unlock billions more in private investment to turbocharge jobs and growth for Wales.”

To be fair to the Tories, they have also noticed the attractions of using wind to generate electricity. Former prime minister Boris Johnson briefly enthused about turning Britain into “the Saudi Arabia of wind”.

Unfortunately, Johnson soon moved on to the next photo call and hopes of government help for wind farms evaporated as swiftly as Labour shadow chancellor Rachel Reeve’s scheme to spend £28 billion per annum on a green investment plan. She lost interest when an expert pointed out that this was going to cost, er, £28 billion per annum.

Coming down from the clouds of hot air emitted by politicians, some renewable energy investment trusts are already generating green electricity - and decent dividends - here and now. Step forward, Greencoat UK Wind (LSE:UKW), the self-descriptive pooled fund with total assets of £4.8 billion that claims its wind farms produced 4,362 gigawatt hours (GWh) of electricity last year, or sufficient to power more than 1.8 million homes.

Income-seeking investors might be more impressed by UKW’s success in raising dividends at least in line with inflation since the trust was formed in 2013. Independent statisticians Morningstar calculate UKW shareholders’ income has increased by an annual average of 8.1% over the last five years, to produce a current yield of 7.4%.

It is important to beware that dividends can be cut or cancelled without notice and the past is not necessarily a guide to the future. However, if that historic rate of ascent is maintained, it would double shareholders’ income in less than nine years.

No wonder UKW is the top performer in the Association of Investment Companies (AIC) Renewable Energy Infrastructure sector over the last decade and five years with total returns of 126% and 29% respectively, although it continues to trade at a -17% discount to net asset value (NAV).

As discussed here before, a perfect storm” of rising interest rates elsewhere, the Conservative government’s windfall tax on North Sea energy producers - and a bungled electricity auction - placed the sector under a cloud and pushed UKW into a negative return of -7.8% over one year.

That short-term setback left the one-year top slot vacant for Triple Point Energy Transition Ord (LSE:TENT) to grab with a total return of 5.26%. However, this £97 million fund will be too small and illiquid for many wealth managers and it lacks any five or 10-year track record.

Over the long term, UKW’s closest rivals include Bluefield Solar Income Fund (LSE:BSIF), which despite the British weather, produced total returns over the last decade, five years and one-year periods of 83%, and 6% before a shocking loss of -21%. Another rival, Renewables Infrastructure Grp (LSE:TRIG) delivered 69%, 10% and -16% over the same three periods.

BSIF yields 8.8% dividend income, rising by nearly 3% per annum, and trades at a -27% discount to NAV. Meanwhile, TRIG yields 7.7%, rising by an annual average of just over 2%, and trades at a -24% discount to NAV.

Against all that, climate change deniers continue to argue that wind farms are expensive and unreliable in a debate that often generates more heat than light.

By contrast, the biggest fund manager in the world this week called for a more “pragmatic” approach to energy strategies. Larry Fink, chief executive of BlackRock, reported in his annual letter to investors that he visited 17 countries last year, meeting senior figures from business and politics. He observed: “These leaders were far more pragmatic about energy than dogmatic. Nobody will support decarbonisation if it means giving up heating their home in the winter or cooling it in the summer. Or if the cost of doing so is prohibitive.”

On the fossil fuels versus renewable energy debate, Fink concluded: “The world still needs both.” Such even-handed common sense won’t impress the keyboard warriors but seems our best hope of keeping warm and in work, whatever happens next in Gaza and Ukraine.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Greencoat UK Wind (UKW), as part of a globally diversified portfolio of investment trusts and other shares.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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