With a 10.3% yield, am I crazy not to buy this dirt cheap dividend stock?!

Dividend stocks are a phenomenal way to generate passive income. And even though the stock market’s near an all-time high, there are still plenty of discounted shares to capitalise on. Some are even offering massive yields!

Looking at my own income portfolio, Greencoat UK Wind (LSE:UKW) currently stands out. The wind farm owner is struggling to keep investors interested despite benefiting from energy transition tailwinds and maintaining its inflation-linked dividend.

That’s translated into some pretty lacklustre share price performances, with its market-cap shrinking by 23% since the start of the year. But with the stock now trading at a massive 27.6% discount to its net asset value, the yield’s reached into double-digit territory at 10.3%.

So the question now becomes, is this a rare chance to lock in enormous dividends? Or is this a trap to avoid like the plague? Let’s find out.

Are dividends affordable?

Investor sentiment surrounding renewable energy stocks is exceptionally weak. And for the most part, the blame can be put squarely on a combination of falling electricity prices and elevated interest rates.

Building out wind farms is quite an expensive endeavour. But with debt being so cheap prior to 2022, courtesy of near-zero percent interest rates, this historically hasn’t been a problem. Skip ahead to 2025, and Greencoat has accumulated almost £1.8bn of debt costing £94m a year in interest versus just £18m in 2020.

With interest rates starting to fall again, the financial pressure is slowly starting to ease. In the meantime, the group’s highly cash-generative business model means that the company continues to make enough excess earnings to cover dividends by around 1.4 times.

Admittedly, that’s much tighter compared to the near two times dividend coverage a few years ago. Nevertheless, it demonstrates that even with a double-digit yield, shareholder payouts remain affordable.

But if that’s the case, why aren’t more investors taking advantage of the massive payout?

Long-term uncertainty

There are currently three major concerns surrounding Greencoat’s business:

• While debt’s seemingly under control, the firm’s gearing is nonetheless sitting extremely close to management’s self-imposed limit of 40%
• UK wind speeds have been falling seemingly as a result of the changing climate, resulting in lower power and therefore cash generation
• Speculated changes to renewable energy subsidies through the renewable obligation indexation are resulting in substantial regulatory risks

Out of these three issues, only one is really within management’s control. And as such, even if the company executes perfectly, it may nonetheless be undermined by external forces that could eventually compromise dividend affordability.

The bottom line

Greencoat’s a dividend stock surrounded by regulatory, political and, ironically, environmental uncertainty. And with British investors being notoriously risk-averse, it’s understandable why many are reluctant to invest in this enterprise in 2025.

Nevertheless, given the massively discounted valuation and cash-flow-backed dividend yield, income investors may want to mull over whether or not these risks are worth taking.

The post With a 10.3% yield, am I crazy not to buy this dirt cheap dividend stock?! appeared first on The Motley Fool UK.

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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.

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