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The FTSE 250 is packed with dividend-paying stocks to buy and earn a passive income. And right now, Foresight Solar Fund (LSE:FSFL) stands out with one of the highest yields in the index.
At 12.4%, for every £1,000 invested in this renewable energy enterprise, £124 is earned through dividends. And what’s more, the stock is also trading at a massive 36% discount to its net asset value. Of course, experienced investors know that a double-digit yield and a dirt-cheap valuation can be a signal of trouble ahead.
Yet looking at Foresight’s financials, the company continues to generate enough money to cover its shareholder payouts. In fact, its exceptionally cash-generative business model has enabled Foresight to hike dividends every year over the last decade. And right now, it’s on track to deliver its 11th year of consecutive payout increases.
So, what’s the catch?
Why investors don’t like renewables
Foresight Solar is not the only renewable energy stock paying a ginormous dividend yield right now. Bluefield Solar Income, along with Greencoat UK Wind, are in a similar situation with massive yields alongside chunky share price discounts.
Given that electricity demand is on the rise and remains resilient even during economic downturns, each of the businesses has seen its cash flows expand, fuelling ever-increasing shareholder payouts. And even today, the cash flow still looks solid.
Ignoring curtailment in Spain and an unexpected outage in UK network operators, Foresight’s solar farms have been outperforming, generating more electricity than expected thanks to sunny weather. And with power price forecasts also getting revised slightly upward, the long-term sustainability of this business seems to be intact.
At least, that would be the case if it weren’t for one small detail – renewable subsidies are under attack.
Politics versus the cost of living
With the cost of living continuing to climb, the UK government is under a lot of pressure to take action. And in an attempt to reduce energy bills, green levies have been cut while the inflation index for Renewable Obligations (ROs) is in the process of swapping from the Retail Price Index (RPI) to a Consumer Price Index (CPI).
This situation is a little complicated. But in oversimplified terms, these decisions could translate into a significant subsidy cut for green energy generators, indirectly reducing the value of their renewable infrastructure assets, and directly impacting their revenue stream.
Now throw in the added pressure of higher interest rates on enormous outstanding debts, and there is suddenly a very real risk of dividends getting slashed. With that in mind, it’s easy to understand why investor sentiment in this space is currently so weak.
A hidden buying opportunity?
There’s no denying that investment uncertainty within the renewables space is sky high at the moment. But it’s also worth pointing out that most of these changes have yet to be implemented. The government is actively engaging with the industry too.
Foresight’s own ‘worst-case-scenario’ forecast predicts the group’s net asset value will fall by around 10%. Even if this drop happens, the share price today is still at a double-digit discount. This suggests that investors are potentially being a bit too pessimistic.
Personally, the risk and uncertainty are too high for my tastes. But for more adventurous income investors, Foresight Solar could be worth a deeper dive.
