I admit my investment in utility group Centrica has been a disaster. This stock has fallen by more than 50% over the last year.
I’m still holding Centrica, as I explained here. But I won’t buy more until the outlook becomes clearer. If I was starting again today, I’d probably choose to invest in one of the renewable energy investment trusts which trade in the FTSE 250.
These usually offer dividend yields of more than 5% and have delivered steady growth in recent years. Here, I’ll highlight my three top choices.
Wind + growth opportunities?
Wind power is the obvious choice for renewable energy investors in the UK and northern Europe. My top choice in this sector is The Renewables Infrastructure Group (LSE: TRIG), which has a £1.6bn portfolio of renewable assets. Of these, 55% are located in the UK, with the remainder in Sweden (19%), France (13%), Germany (8%), and the Republic of Ireland (5%).
Most of the group’s cash is invested in wind farms, which account for 86% of its portfolio. The remainder is invested in solar (13%) and battery (1%) storage facilities.
I like the way TRIG’s portfolio is focused on UK wind but provides exposure to other countries and other types of energy. In my view, this should leave the trust well-positioned for expansion into new markets when opportunities arise.
TRIG’s original dividend of 6p per share has risen broadly in line with inflation and now stands at 6.6p per share, giving a 5.2% dividend yield.
Pure wind
If you’d prefer to focus on wind power only, then I reckon the best choice could be Greencoat UK Wind, which only invests in such projects. The trust’s focus is mainly onshore wind farms, although exposure to offshore is increasing. In total, Greencoat has 979MW of generating capacity and reported a net asset value of £1.9bn at the end of June.
The trust’s policy is to increase its dividend in line with RPI inflation. The payout has risen from 6.16p per share in 2014 to a current level of 6.85p per share, giving a dividend yield of 5%.
What about solar power?
Solar farms are an increasingly common sight around the UK. My top choice for a related investment would probably be NextEnergy Solar Fund. NextEnergy mainly invests in operating solar power plants around the UK. It’s not allowed to invest more than 15% overseas. The company has a net asset value of £645m and pays a dividend of nearly 6.7p per share, giving a 5.6% dividend yield.
2 things you should know
There are two risks I’d like to point out, which apply to all of these renewable energy investments.
Interest rates could rise: this would increase the cost of financing for new investments and could reduce the amount of spare cash available for dividends.
Power prices could fall: the other big risk for investors is future power prices will be less predictable and could fall. At present, most renewable projects sell their power at fixed rates backed by government subsidies. This may not always be the case. Prices — and profits — could be less predictable in the future.
Renewable energy investment is still relatively new, so long-term returns are unproven. But I believe this could be an attractive sector for income investors — and a good alternative to utilities.