Wind in the UK’s sails?

Despite COVID-19, dividend hunters continue to back the green revolution.

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  1. Ben Johnson

The UK equity market is often criticised by investors for being stuck in the past. Too much exposure to the oil giants. Home of too many miners and tobacco stocks. And so on. Yet the UK is quietly becoming a global leader in renewable energy, and this is good news for dividend hunters.

There are a few ways of playing the growth in renewable energy. One obvious one is by buying shares in utilities companies, the likes of SSE or United Utilities for example. Utilities are among the biggest investors in renewable energy assets, but these companies come with a lot of baggage that may not appeal to the green-minded investor.

A more direct route to participating in the renewable energy story is by investing in dedicated renewable energy investment trusts. These funds own stakes in projects that generate renewable energy and receive revenue based on what they produce, which is used to pay dividends to investors. This part of the market has enjoyed huge growth in recent years, with investors drawn to the high and reliable yields on offer. Further evidence of this emerged in September, when Greencoat UK Wind, one of the biggest UK renewable energy funds, completed a round of fundraising to support future growth. It proved to be very successful, raising £400m from investors, meaning the trust now has a market value of around £2.4bn.

The scale of this equity raise in a buoyant market would be impressive. The fact that it was achieved against a backdrop of widespread dividend cuts in UK companies and weakness in the domestic equity market is even more eye-catching. Contrast this to the fortunes of Royal Dutch Shell and BP, the UK’s two oil majors, both of which have been battling continued weakness in the oil price and have been forced to cut dividends to more sustainable levels.

There are two dominant types of renewable energy projects that these funds invest in. The first, wind farms, are seen as the most efficient. Prime Minister Boris Johnson recently stated that he wants to turn the UK into the “Saudi Arabia” of wind power. A bold statement, but the UK does in fact has some of the most favourable conditions for wind farms and huge capacity will be coming online in this area in the coming years. Geographically we are particularly well placed to harness the power of offshore wind projects, which are much larger in scale and can create huge amounts of electricity, albeit they are more operationally challenging than onshore and much more expensive to set up.

The other key renewable energy source, solar, also forms a key part of the energy mix in the UK. These projects are more straightforward operationally, so it is much quicker to get a new solar park online. The technology used in the panels continues to mature, making gains in terms of energy generation efficiency and in terms of reliability. Although wind power appears to have taken the lead in the UK, a diversity of energy sources is important, given the variability of weather patterns over short time periods.

The maturing of the renewable funds sector means investors can be increasingly selective about what exposure they want to take on. Do they want a dedicated wind fund, a pure solar play, or a mixture of the two technologies? Do they want a UK focused portfolio like that of Greencoat UK Wind, or something more internationally diversified such as The Renewables Infrastructure Group? Whatever the desired exposure, income investors should sit up and take notice of the dividend opportunities on offer.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

 

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