The UK stock market is often criticised by investors for being stuck in the past. Too much exposure to the oil giants, the home of numerous miners and tobacco stocks, and so on… but this ignores the positive developments that have been happening under the radar of many investors.
The UK is quietly becoming a global leader in renewable energy, and this is good news for dividend hunters hurt by recent cuts in shareholder payments from many companies struggling with the impact of Covid-19.
There are a few ways of playing the growth in renewable energy. One obvious strategy is to buy shares in utilities such as SSE or United Utilities. The sector is 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 in which these funds invest. The first, wind farms, are seen as the most efficient. Prime Minister Boris Johnson said in September that he wants to turn the UK into the “Saudi Arabia” of wind power. A bold statement, but the UK does in fact have some of the most favourable conditions for wind farms – and huge capacity will be coming online 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. However, such installations can be more operationally challenging than onshore set-ups – and much more expensive to construct.
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, resulting in gains in terms of energy-generation efficiency and 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 maturation of the renewable-funds sector means investors can be increasingly selective about their exposure to different subsectors. Do you want a dedicated wind fund, a pure solar play, or a mixture of the two technologies? Do you want a UK-focused portfolio such as that of Greencoat UK Wind or something more internationally diversified such as The Renewables Infrastructure Group (TRIG)? Whatever the desired exposure, income investors should sit up and take notice of the dividend opportunities on offer as the clean-energy revolution gathers pace.
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