58,939 shares of this UK dividend stock unlock £500 a month in passive income today
Dividend stocks are a fantastic way to start earning passive income. Luckily for British investors, there’s plenty of high-yielding opportunities to capitalise on, offering chunky quarterly dividends. And one stock that’s proving quite lucrative for my own income portfolio is Greencoat UK Wind (LSE:UKW).
The renewable energy real estate investment trust (REIT) has lost a lot of love from investors as higher interest rates and declining energy prices are pressuring profits. And yet, despite these headwinds, the firm continues to pay out inflation-linked dividends to shareholders, offering a staggering 9.3% yield right now.
That’s almost three times what the FTSE 100 index investors are earning right now. So is this a no-brainer buy right now?
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Tasty income potential
Let’s say the goal is to earn the equivalent of £500 monthly passive income, or £6,000 a year. Looking at Greencoat, at a dividend per share of 10.18p, that means an investor would need to buy roughly 58,939 shares.
At the current share price of 110p, that means a £64,833 investment would need to be made in Greencoat shares. That’s obviously quite a large lump sum, but it’s significantly less than the roughly £187,500 needed to earn the same passive income through a FTSE 100 index fund right now.
What’s more, with such a large payout, investors could easily build to this milestone over time â a journey that would be accelerated if management continues its dividend hiking policy.
But if that’s the case, why aren’t more investors jumping on this seemingly gold mine of an income investment?
Risk versus reward
Despite my relatively bullish stance on this enterprise, this is definitely one of my riskier income positions.
As previously mentioned, the renewable energy space is facing growing levels of uncertainty at the moment. And even though Greencoat is one of the largest players in the UK, the firm still has several weak spots that could prove problematic depending on how the macroeconomic landscape develops.
Perhaps the biggest issue right now is the group’s high degree of financial leverage. Greencoat operates with a self-imposed gearing limit of 40% to prevent the balance sheet from becoming too debt-heavy. And earlier this year, the group breached this limit, albeit temporarily.
Management was able to reduce some of its borrowings through asset sales. Yet that also means its energy production capacity has also decreased, adversely impacting cash flow generation capabilities.
Is this a major problem? Currently, no. Despite the headwinds and concerning debt levels, dividends and interest payments are still comfortably covered. Yet the margins are tighter compared to a few years ago.
Further interest rate cuts will help alleviate some of this pressure. Yet with wind speeds slowing and energy prices falling, it’s possible that the benefits of lower rates may ultimately be offset by these headwinds.
The bottom line
As dividend stocks go, Greencoat’s track record remains impressive. The companyâs proven far more resilient compared to other players in this space. And with the UK government seeking to drastically ramp up the country’s renewable energy infrastructure, the business seems to be well-positioned to profit from these political tailwinds.
Combining this with the enormous cash-flow-backed yield is why I continue to be a shareholder despite the growing level of risk. But it’s not the only dividend stock I’ve got my eye on this month.
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Zaven Boyrazian has positions in Greencoat Uk Wind Plc. The Motley Fool UK has recommended 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.
