With plenty of UK shares falling in the current market environment, dividend yields are on the rise. And while there are plenty of massive-looking payouts available, many seem to be unsustainable. Yet there is one company that’s recently caught my attention. In fact, it looks so promising that I’d happily hold it in my ISA for the next decade, enjoying the currently 5% annual passive income. Let’s explore.
UK renewable energy shares
With oil prices going through the roof, renewable energy stocks don’t seem to be at the front of investors’ minds anymore. And while plenty of shares were overhyped in the past, Greencoat UK Wind (LSE:UKW) seems to be an exception.
The group owns a network of 43 on- and off-shore wind farms with a generating capacity of 1.42 gigawatts. That’s roughly enough to power just over one million homes. And with its asset portfolio already established, the group is immensely profitable. In fact, operating margins at the end of 2021 stood at a staggering 93%! And yet, this might be just the tip of the iceberg.
Being a largely fixed-cost operation, Greencoat’s margins are ultimately tied to the direction of regulatory price caps on electricity. When regulators push the limit down, it directly harms the company’s bottom line. But with these price limits recently lifted, profits are expected to follow. At least, that’s the impression I’m getting from management, who have already announced their intention to raise dividends by 7.5% this year, sending the yield even higher.
The question then becomes, can this be sustained? In my opinion, yes. As part of the British government’s Green Industrial Revolution, £20bn is being invested into expanding the country’s wind power infrastructure over the next decade. That undoubtedly creates new long-term opportunities for the firm and, in turn, my passive income portfolio. That’s why I think Greencoat UK Wind could be one of the best UK shares for me to buy now.
Threats to the dividend yield
Sadly, nothing is risk-free, not even government-backed renewable energy infrastructure. This immense market opportunity hasn’t gone unnoticed. And even some of the oil giants are making moves. BP, in particular, is aiming to generate up to 20 gigawatts of clean electricity by 2025.
As more competition enters the space, the supply of electricity will obviously increase. And if the growth rate of power generation starts to exceed the increase in demand, prices will begin to drop. That’s terrific news for consumers, not so much for Greencoat. As I said earlier, this UK share’s profitability and subsequently passive income providing capabilities are ultimately tied with electrical prices – something beyond management’s control.
This could potentially jeopardise the dividend yield in the long run. However, establishing a new infrastructure takes a long time, even for industry titans with vast amounts of resources. Therefore, the risk of market saturation shouldn’t occur overnight and is far easier to keep tabs on. That’s why I feel this is a risk worth taking for my portfolio.