Investors with £5,000 in these UK dividend shares are earning a yield of…

Despite being mainly known for growth opportunities, there are plenty of lucrative dividend shares in the FTSE 250. And right now, two of the highest-yielding income opportunities are NextEnergy Solar Fund (LSE:NESF) and Foresight Solar Fund (LSE:FSFL).

In fact, equally splitting £5,000 across these two stocks unlocks a combined yield of 10.9% – enough to start earning £545 passively overnight. But is this actually a good idea?

The bull case

With both businesses focused on investing in renewable energy assets and using the cash flow to pay an inflation-linked dividend, the appeal for investors is clear. Electricity demand is rising exponentially, resulting in a continuous stream of energy income to cover both debt interest and dividend payments. In fact, the dividend coverage ratios for both these stocks currently sit comfortably above the all-important level of 1.0.

NextEnergy Solar and Foresight Solar both have diversified portfolios of renewable energy assets spanning Britain, with the latter also investing internationally in markets including Spain. And with government policy pushing the energy sector towards Net Zero, the bountiful subsidies are providing strong support to fuel long-term growth.

Pairing all this, with both dividend shares trading at double-digit discounts to their net asset value, a seemingly lucrative buying opportunity has emerged for value as well as income investors. This valuation discount, paired with continuous dividend payments, is why the yield’s so high today. But why aren’t more investors taking advantage?

Risk versus reward

No investment is ever risk-free. And while renewables may sound like a safe and reliable bet for passive income, there are looming headwinds that could create problems for the sector in the future. The most prominent of these is the expected decline in long-term power prices.

With energy grids being modernised, the supply of energy is on track to rise, putting downward pressure on electricity prices. While that’s good news for consumers, it creates challenges for energy generators like NextEnergy and Foresight.

After all, unless these lower prices are offset by higher energy production volumes, the cash flow for both businesses will eventually decline, hurting the dividend coverage ratio. Even if the companies boost their solar capacity, there remains the continued risk of unfavourable weather, potentially causing energy generation to come in under budget.

Needless to say, there’s a lot of external uncertainty surrounding these dividend shares and the wider renewables sector in general. That’s why many green energy stocks currently offer such impressive yields.

The bottom line

While the risks are significant, their management teams aren’t blind to them. Strategic divestments and reallocation of capital to reduce debt burdens are already under way to alleviate existing pressure on shareholder payouts. In the short term, this introduces execution risk. But in the long run, if successful, these moves should ultimately help support sustainable passive income.  

There’s no denying, investing in these shares comes with a high level of risk in 2025. In fact, that’s why the yields are so high. But with the double-digit yields still being covered by existing cash flows, these investments may be worth deeper investigation.

Don’t forget, the most unpopular investments can sometimes be the most lucrative in the long run.

The post Investors with £5,000 in these UK dividend shares are earning a yield of… appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Foresight Solar Fund. 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.

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