8 of the FTSE 250’s 11 highest-yielding passive income stocks have 1 thing in common
Those looking to generate more passive income from their portfolios have probably noticed there are plenty of high-yielding stocks on the FTSE 250 at the moment. In fact, there are 11 currently (pre-open on 1 September) offering a return in excess of 9%.
Of these, eight are investment trusts that have exposure to renewable energy. Look closer and it can be seen that three operate in the solar sector, three focus on infrastructure and another invests in wind power. The remaining one, SDCL Energy Efficiency Income Trust (LSE:SEIT), is probably the most interesting as it presently offers the second-highest yield (based on amounts paid over the past 12 months) but also trades at the biggest discount (36.9%) to its net asset value. At first glance, it appears to offer excellent value for money.
| Stock | Yield (%) | Premium/(Discount) (%) |
|---|---|---|
| NextEnergy Solar Fund | 12.4 | (25.2) |
| SDCL Energy Efficiency Income Trust | 11.0 | (36.9) |
| Foresight Environmental Infrastructure | 10.0 | (24.9) |
| TwentyFour Income Fund | 9.9 | 1.3 |
| Foresight Solar Fund | 9.8 | (23.9) |
| Bluefield Solar Income Fund | 9.8 | (22.8) |
| The Renewables Infrastructure Group | 9.7 | (28.1) |
| Ashmore Group | 9.5 | n/a |
| GCP Infrastructure Investments | 9.5 | (27.4) |
| Energean Oil & Gas | 9.5 | n/a |
| Greencoat UK Wind | 9.2 | (24.0) |
| Average | 10.0 | (23.5) |
But does it?
Letâs take a closer look at the trust that invests in private companies offering energy efficiency solutions. According to its most recent factsheet, it has positions in 50+ companies in five sectors (healthcare, industrial, commercial, retail and data centres) operating across three continents (Europe, Asia and the US).
Wider problems
The first thing to note is that the stockâs yield has been boosted by a falling share price. Over the past year â since August 2024 â itâs âonlyâ fallen by 6%. But looking back five years, itâs nearly halved. During the same period, its dividend has risen 26%. The overall effect is to improve its yield to 11%.
Although itâs hard to tell, I suspect some of the loss of market value has been caused by investment trusts falling out of favour. A higher interest rate environment makes other less-risky assets more attractive.
Investors could also have concerns about the valuation of the assets in which they invest. This is particularly relevant for SDCL as it has positions in unlisted companies. These can be hard to value accurately and itâs often difficult to quickly convert these investments into cash should the need arise.
Another problem is that the renewables industry is going through a period of transition. The direction of travel is undoubtedly towards cleaner energy. But cash-strapped governments are coming under pressure to reduce subsidies and support for the sector.
What next?
The trust has been discussing possible strategic options with its shareholders. These conversations have stressed the importance of maintaining the dividend and continuing with asset disposals with a view to reducing debt. Having said that, I donât think the trust is particularly highly geared. But any debt reduction is to be welcomed as it reduces borrowing costs and frees up more cash for a dividend.
My research suggests that SDCL’s large discount is predominantly due to industry-wide problems rather than anything specifically wrong with the trust. For this reason, those looking for a high-yielding stock could consider taking a position in SDCL Efficiency Income Trust. I also think it could deliver capital growth. However, this might take some time due to the sectoral and industry issues outlined earlier. Impatient growth investors should probably look elsewhere.
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James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Foresight Solar Fund and Greencoat Uk Wind Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
