12.5% dividend yield! Could buying this FTSE 250 stock earn me massive passive income?
The FTSE 250‘s filled with dividend-paying stocks offering chunky payouts. And right now, Foresight Solar Fund (LSE:FSFL) stands out as one of the most generous, with a yield stretching to 12.5%!
At this rate, that means for every £1,000 invested, shareholders could earn £125 in passive income. So is this a screaming buy, or is it too good to be true?
The struggles of energy infrastructure
Foresight Solar’s a bit of a complicated business. But in simplified terms, it owns and manages a portfolio of solar farms scattered across the UK, Spain, and Australia, selling its green electricity to local energy suppliers.
Like many renewable energy stocks, Foresight’s found navigating a higher interest rate environment significantly more challenging, with the valuation of its assets dragged down.
This headwind’s only been amplified by the downward shift in long-term power price forecasts. To make matters worse, renewable subsidies are also at risk of being adjusted to be far less generous, adding even more pressure to the business.
Combined, these headwinds have dragged the groupâs net asset value down by almost 10% across the first six months of 2025. And with investor sentiment on renewables souring, the share price has suffered an even bigger 20% tumble since.
However, despite these challenges, dividends have continued to flow to shareholders. In fact, theyâre actually on track to deliver 11 years of consecutive payout hikes. And when mixing a growing dividend with a falling share price, the yield’s been pushed into double-digit territory.
So with the damage seemingly already baked into the share price, is this secretly a buying opportunity?
Capitalising on uncertainty
Even after the groupâs net asset value tumbled, the stock still trades at a pretty extreme 36.6% discount. This is a clear reflection of the uncertainty surrounding the renewable energy sector in 2025. Yet itâs something management’s already aiming to take advantage of through a share buyback programme.
Whatâs more, when digging into the firmâs actual cash flows, Foresightâs earnings continue to cover shareholder dividends, funding its substantial yield despite all the pessimism. And with interest rates steadily being cut, the pressure from its outstanding debts is slowly being alleviated, helping boost its dividend coverage even more.
A risk worth taking?
Despite robust cash flows, I canât help but wonder if Foresightâs yield is nothing more than a sirenâs song. With renewable subsidies being reviewed and expected to be cut, the groupâs current cash flows could soon prove insufficient to maintain its current payout.
Given its steep share price discount, itâs possible that investors are being overly pessimistic. But with no clear catalysts to rebuild sentiment, the risks surrounding this FTSE 250 stock seem far too great for my tastes. Instead, I think there are far better dividend opportunities to explore elsewhere.
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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.
