There are a number of methods with regards to investing for a second revenue. Some purpose for slow-but-reliable positive factors over a protracted interval. Others purpose for prime returns from undervalued shares with development potential.

I feel shopping for shares with excessive yields and reinvesting the dividends to compound the returns is an efficient technique. However whereas a number of the highest yields go up to fifteen% or extra, they aren’t essentially dependable. It’s finest to decide on shares with a protracted observe report of creating funds and rising the yield.

A great instance is Greencoat UK Wind  (LSE:UKW) , a FTSE 250 actual property funding belief (REIT) that invests within the renewable vitality sector. REITs present a 20% tax-deductible profit for particular person shareholders.

Please observe that tax remedy will depend on the person circumstances of every shopper and could also be topic to vary in future. The content material on this article is offered for data functions solely. It isn’t supposed to be, neither does it represent, any type of tax recommendation.

Harnessing the ability of wind

Greencoat UK Wind specialises in onshore and offshore wind farms. With renewable vitality on observe to achieve a purpose of triple capability by 2030, demand for wind energy ought to stay excessive. The corporate’s property already provide 10Mw of energy to UK houses and final month it signed a brand new 10-year Energy Buy Settlement (PPA) for its Ballybane Part 1 wind farm.

With a 7.5% dividend yield, it’s double the FTSE 250 common yield of three.23%. It’s been paying a dividend constantly for over 10 years, throughout which era it has principally been between 5% and 6%. Nonetheless, the share price of £1.35 hasn’t modified a lot in 5 years, aside from a short improve throughout 2022. However that wouldn’t concern me a lot. It’s pretty frequent of revenue shares, which deal with offering returns through dividends.

Financials and dangers

Whereas the belief’s dividends are regular and dependable, earnings and income are in decline. Projections point out it might change into unprofitable subsequent yr. With elevated funding pushing up the share price, its price-to-earnings (P/E) ratio is now at 25 instances. That’s rather a lot increased than the trade common of 16.8.

This additionally means earnings per share (EPS) has decreased to five.5p — effectively under the present 13.7p dividend. Consequently, the yield is perhaps diminished later this yr or subsequent. Nonetheless, based mostly on the prior 10-year observe report, funds ought to stay constant.

The underside line

Greencoat UK Wind has a stable stability sheet that appears secure sufficient to deal with a interval of losses. It’s debt of £1.8bn is well-covered by fairness and property considerably outweigh liabilities. Its debt-to-equity (D/E) ratio is 47% and curiosity protection is 3.1 instances.

With sturdy trade development and an distinctive observe report, I consider the belief will proceed to pay dependable dividends for the indefinite future. And I’m not alone. On 22 Might, Barclays put in an obese place for the inventory, indicating it believes the inventory will outperform its sector common over the following eight to 12 months. 

As such, I feel it might make an ideal extra to a dividend portfolio geared toward constructing a second revenue stream. If I invested £20,000 right into a portfolio with a median yield of seven% and a 2% annual price improve, it might develop to close £400,000 in 30 years. It’s not assured, however that quantity would pay out a second revenue £34,500 in dividends per yr.