Real estate investment trusts (REITs) arenât very fashionable right now. The higher interest rate environment is putting a lot of pressure on these debt-ridden businesses. But with rates steadily falling, and many continuing to generate stable cash flows, dividends are still being put in investor pockets.
The combination of dividends with lower share prices has steadily pushed yields higher over the last couple of years. As such, some yields are now starting to climb beyond 8%!
Greencoat UK Wind‘s (LSE:UKW) a prime example of this, with its payout now stretching beyond 8.5%. Thatâs a little lower than a few months ago, but itâs still the highest level seen in over a decade. And based on current guidance, dividends, even at this massive yield, are set to grow even further in the coming years.
Investing in REITs
Generally speaking, most REITs own and lease rental property to tenants. Providing that 90% of net profits are redistributed to shareholders, they donât have to pay any tax, making them highly lucrative dividend investing vehicles. However, despite the name, REITs donât have to exclusively focus on real estate.
Greencoat’s a perfect example of this, managing a portfolio of onshore and offshore wind farms throughout Britain. Instead of collecting rent, it sells clean electricity to the national grid. And since energy’s in constant demand, it enjoys a relatively stable cash flow to fund shareholder payouts.
However, with so much profit being paid out, these businesses are often almost entirely dependent on external financing. As such, they tend to be highly leveraged enterprises. That was fine for most of the last 15 years. But when interest rates started climbing again, high debt burdens proved quite troublesome for many REITs, increasing investment risk.
Since interest rates are still relatively high, REITs remain unpopular in 2025. Yet not all of these businesses are in jeopardy, potentially giving smart investors a rare chance to lock in enormous yields.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Risk versus reward
Letâs zoom in on Greencoat. Sentiment surrounding the wind power specialist isnât exactly high right now. And to be fair, there are some justified reasons to be concerned. Low wind speeds are causing energy generation to come notably under budget. At the same time, electricity prices have started to fall, and with over £2.2bn of debt on the balance sheet at an average 4.59% interest, thatâs not a nice combination.
Despite these headwinds, the group still generates more than enough cash flow to cover its dividend payments by 1.4 times. And with the stock trading close to a 16% discount to its net asset value, management’s also been leveraging its excess cash flows to buy back shares, returning even more capital to shareholders.
Combining this with supportive government policy and plans to triple the UKâs wind power capacity by 2035, the long-term outlook for this REIT looks promising. Even more so as interest rates steadily fall and more investors start considering REITs again.
Thatâs why, despite the short-term risks, Greencoat UK Wind’s still worth considering, especially while the yield remains at near-decade highs.
The post REITs: a once-in-a-decade passive income opportunity? 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.
