Powering up
Ian Cowie explores the potential for the renewable energy sector
Renewable energy investment trusts enable investors to make their money make a difference for the better and be paid decent dividends to be patient, as well as offering potential for capital growth. If that prospective ‘treble return’ sounds too good to be true, then bear in mind our new government is committed to make Britain “a clean energy superpower”, creating new jobs in solar and wind power, to cut household bills and reduce our dependence on dictatorships financed by fossil fuels.
“Renewable energy investment trusts enable investors to make their money make a difference for the better and be paid decent dividends to be patient, as well as offering potential for capital growth.”
More specifically, Labour’s earliest acts since the General Election included setting up Great British Energy as part of a “green prosperity plan” to invest £5 billion a year in renewable power. Its aims include decarbonising our electricity supply by 2030 and meeting Britain's legally-binding objective, agreed at the COP28 international conference last year, to create an economy that has net zero carbon emissions by 2050.
Against all that, even before Labour was elected, it watered down its original plan to spend £28 billion per annum on renewable energy when critics claimed this would push up fuel bills. Fortunately, politicians’ promises are not the only factor supporting renewable energy.
Some high-yielding investment trusts have already benefited from the Bank of England’s first base rate reduction in four years in August. Global stock markets’ expectation of further rate cuts should make their dividend income relatively more valuable.
Here and now, many renewable power investment trusts remain reasonably-priced. While the average total return from all investment trusts, excluding the outlier 3i, is 126% over the last decade, 36% over the last five years and 17% over the last year, the Association of Investment Companies (AIC) ‘Renewable Energy Infrastructure’ average returns over the same periods are 85%, 10% and 3%.
While the average investment trust share is priced 15% below its net asset value (NAV), the average renewable energy investment trust trades half as cheaply again at a 20% discount to its NAV. So this is certainly not a sector where all the good news is already reflected in prices.
“…some funds can point to long track records of delivering rising dividends and capital growth.”
Even so, some funds can point to long track records of delivering rising dividends and capital growth. For example, Greencoat UK Wind (UKW) is the top-performer in the ‘Renewable Energy Infrastructure’ sector over the last decade and five-year periods with total returns of 129% and 32%, respectively, before 14% over the last year but it remains priced 11% below its NAV.
One reason this UKW shareholder is waiting for happier days ahead is that it currently yields 7% dividend income. This investment trust with total assets of £4.7 billion also increased payouts by an inflation-busting annual average of 8.2% over the last five years, according to independent statisticians Morningstar.
It is important to beware that dividends can be cut or cancelled without notice. However, if UKW could sustain its current rate of dividend growth, it would double shareholders’ income in less than nine years.
Bluefield Solar Income Fund (BSIF) is another self-descriptive trust which ranks second in this sector over five years and yields even more income today. This fund with assets of £1.35 billion delivered total returns over the last decade, five years and one year of 102%, 16% and 1%, but yields 8.2% dividend income, rising at an average of 2.8% per annum. It trades at a 16% discount to its NAV.
Foresight Environmental Infrastructure (FGEN), the £902m fund formerly known as John Laing Environmental Assets (JLEN), yields even more income, 8.6%, also rising by 3% per annum, but total returns were 64%, 6% and -0.2% over the usual three periods. FGEN is priced 20% below its NAV.
Remember that the ‘Renewable Energy Infrastructure’ sector is not the only way to gain exposure to sustainable power. For example, in the ‘Infrastructure Securities’ sector, the top 10 holdings in Ecofin Global Utilities and Infrastructure (EGL) include NextEra Energy (NEE), one of the biggest renewable power businesses, and Constellation Energy (CEG). The latter recently agreed with the software giant, Microsoft (MSFT), to reopen Three Mile Island nuclear power plant to supply carbon-free electricity for artificial intelligence (AI).
Launched in 2016, EGL delivered total returns over the last five years and one-year periods of 48% and 31%. It yields 4.2% dividend income that has risen by 4% per annum over the last five years and is priced 13% below its NAV.
“Renewable energy investment trusts could enable the government to create new jobs, boost fuel security and make Britain a clean energy superpower.”
Renewable energy investment trusts could enable the government to create new jobs, boost fuel security and make Britain a clean energy superpower. They can also deliver dividend income and capital growth to individual investors who want to help make a more sustainable world.
Ian Cowie is a shareholder in Ecofin Global Utilities and Infrastructure (EGL), Greencoat UK Wind (UKW) and Microsoft (MSFT) as part of a diversified portfolio of investment trusts and other shares.
