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While unpopular right now, renewable energy dividend stocks are offering some pretty chunky payouts to income investors. Higher interest rates have tested the resilience of many of these businesses. But with energy demand still rising and the UK government pushing towards Net Zero, the better-capitalised firms are still generating ample cash flow.
That certainly seems to be the case for Foresight Solar Fund (LSE:FSFL), which has been busy hiking shareholder dividends each year for a decade. And when combining higher payouts with a lower share price, the dividend yield now stands at a jaw-dropping 9.2%!
So should investors consider going against the crowd and start earning passive income from solar farms? Or is there a justified reason to steer clear?
The bull case
A big problem for wind farm energy giants such as Greencoat UK Wind has been weather issues. Calmer wind speeds have caused electricity generation to come in significantly under budget. Yet that hasn’t been a problem for Foresight Solar.
With warmer weather and more sunny days, Foresight’s solar panels have been working overtime, with electricity generation coming in ahead of the expected budget. And that comes with an impressive power-pricing hedging portfolio. So the group’s been immune to most of the recent energy price drops, so far.
That opens the door to both predictable and consistent cash flow, enabling management to maintain shareholder payouts both in the form of a 9.2% dividend yield as well as a £50m share buyback programme.
Operational challenges
At the generation stage of the pipeline, Foresight seems to be outperforming the wider renewable energy sector. However, moving further downstream to distribution is where things start to wobble. Network operator outages have prevented Foresight from fully capitalising on the strong solar environment.
This perfectly highlights one of the many external risk factors that the company has to contend with. But management seems to be taking action. With the bulk of outages concentrated in Australia, the firm’s begun divesting its assets to focus more on the UK market, which is currently outperforming.
Executing divestments can result in a leaner and more efficient operation. However, with renewable energy assets valued significantly lower compared to a few years ago, the firm runs the risk of destroying shareholder value if it sells its solar farms at a lower price than it acquired them.
The bottom line
Strategic uncertainty’s never pleasant to see. However, so far, management seems to be navigating the higher interest rate environment admirably. Dividend cover for 2025’s on track to land at around 1.3. That’s a bit tight compared to historical levels, but it still provides some wiggle room for error before dividends are potentially compromised.
Therefore, while this dividend stock undoubtedly carries risk, the high yield seems too good to ignore. That’s why I think investors may want to look at this income opportunity more closely.
