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Mid-cap FTSE 250 The index is not the first place many investors look for high dividend yields. However, I think it would be a mistake to ignore this part of the market when hunting for income.
My research suggests that there are attractive high-yield opportunities in the FTSE 250 right now. The stock I'm going to look at today has a dividend yield of over 10%. Here's why I'm interested.
US exposure adds diversity
SDCL Energy Efficiency Income Trust's (LSE: SEIT) investment trust focused on clean energy assets in the UK and US.
The trust's biggest investment is US company Onyx, which supplies solar panel systems to business customers in 14 states. In the UK, SDCL has invested in the EV Network (EVN), which provides charging infrastructure for electric vehicles.
SDCL listed on the London Stock Exchange in 2018 and has maintained a cash-backed dividend since its dividend in 2019.
In the September update, the trust's management confirmed that SDCL was on track to deliver a target dividend of 6.32p per share for the 2024/25 financial year. That gives the shares a positive forecast yield of 10.5%, at the time of writing.
Temporary challenges
One of the reasons for this high profit is that SDCL shares are currently trading at a 30% discount to their March 24 share price of 90p per share. Large discounts are common across the board for renewable energy investment prospects at the moment, mainly due to the impact of high interest rates.
This large discount is both a risk and an opportunity, in my opinion.
If SDCL can maintain its debt financing at affordable levels and continue its profitability, I think the shares should trade close to the booking value in the long run.
The challenge currently is that because the shares trade at a discount to book value, SDCL cannot raise capital by issuing new shares. This means that the only way to get cash is through debt or asset sales. SDCL says it needs to provide additional capital to support the growth of Onyx and EVN.
Management is in the process of negotiating an extended credit plan and expects to provide an update later this year. But the situation is still uncertain.
Why am I interested
Most other renewable energy trusts have recently agreed to sell assets at prices commensurate with their book value. SDCL's track record is good so far, in my opinion. My guess
If I am right, SDCL will be able to pay off some debt and convince the market that its valuations are realistic.
Currently, this year's dividend is expected to be paid in full. Interest rates are also still expected to fall, although perhaps more slowly than originally expected.
On balance, I think SDCL shares offer me an opportunity to lock in high yields. Over time, I can also benefit from a practical benefit.
I'm fully invested at the moment. But if money is available in my income portfolio, I will consider investment in SDCL.
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