Renewable energy stocks are popular at the moment, but I reckon it’s still possible to find decent value in this sector. I’d like to add some exposure to renewables to my passive income portfolio so I’ve identified two companies I’d like to buy.
I expect these two shares to offer a combined dividend yield of 6% in 2022 — and potentially for many years beyond. However, it’s worth remembering that dividend payments are never guaranteed. I wouldn’t plan to use my dividend income to replace cash savings.
#1: Solar-powered dividends
My first choice is NextEnergy Solar Fund (LSE: NESF), which operates solar farms across the UK, Italy and Spain. At the end of September, NextEnergy had 99 assets with a total capacity of 895MW. These were valued at just over £1bn, so it’s a substantial operator.
You might think the UK is not the most profitable place to install solar panels, and I’d probably agree. However, more than 90% of NextEnergy’s generating capacity is backed by government subsidies and long-term power purchase agreements. This means revenue is far more predictable (and higher) than it would be otherwise.
Indeed, the biggest risk I can see for investors is that these government subsidies will be scaled back in future years. This might mean that some of NextEnergy’s UK operations would become less profitable — or even loss-making.
The good news is that its management is already taking steps to address this risk. One change is that the company is selling more energy directly to large electricity users, such as Budweiser brewer AB InBev. NextEnergy is also investing in battery storage and expanding its overseas operations in warmer countries where solar power is more productive.
NextEnergy stock currently trades broadly in line with its book value of 103p per share. Management has said it intends to pay a dividend of 7.16p per share for the year ending 31 March. This gives a potential yield of almost 7%. I think the shares are attractively valued and would buy them for passive income.
#2: Inflation-linked dividends
Wind power is a more obvious way to generate renewable energy on our small island. I’ve been following wind farm owner Greencoat UK Wind (LSE: UKW) for a number of years now and my view remains very positive.
Although most of Greencoat’s farms also receive subsidies, my feeling is that these may be less important. With generating costs coming down, I believe wind power will become profitable without subsidies in the UK.
My main concern with this business is that the rush of new money into renewables could push up the cost of acquiring new wind farms. That could put pressure on shareholder returns. However, Greencoat seems to have managed this risk successfully so far.
I’m also encouraged to see that respected City asset manager Schroders is buying into Greencoat Capital. Confusingly, this is a separate company that manages the investments made by Greencoat UK Wind.
The Schroders deal shouldn’t change anything for UKW shareholders. But I’m impressed by the City firm’s involvement. Schroders has a reputation for long-term thinking.
Greencoat shares offer a 5.3% dividend yield, based on management guidance for 2021. The company also aims to link dividend growth to inflation. For these reasons, I see Greencoat UK Wind as an attractive buy for my portfolio in the current market.