The prices of renewable energy funds fell by an average of 3.1% last month, taking their one-year decline to nearly 17%. Most of these funds are trading at discounts of more than 20% to net asset value (NAV) and have dividend yields well above 6%.

It is important to look beyond the headline numbers, however, and I thought I might illustrate this with three investment companies in the middle of the dividend yield league table.

Tardy ROOF

Atrato Onsite Energy (ROOF ), which today said it had arranged a £30m secured, interest-only credit facility over three years, yields 6.9% and stands on a 22.5% discount.

ROOF’s share price first slid below asset value last October. With a market value of £108m, ROOF is one of the smaller funds in the sector, which may deter some large investors but is unlikely to be the main problem with the rating. It is a relatively new fund, having successfully floated in November 2021, and paid its first dividend in May 2022.

ROOF took a while to invest the proceeds from its initial public offer (IPO) and so had to pay its first few dividends from capital rather than income generated from holdings. That is not ideal and is one reason why the discount emerged last year and why it may persist for a while yet.

The company’s target dividend for the financial year to 30 September is 5p per share, unchanged on a pro-rata basis from the previous year. In June, in half-year results to 31 March, dividends were still running ahead of operating cash flow. However, helped by investment into a ground-mounted solar project, it could at 31 May finally claim to have fully committed its IPO cash.

A sizeable proportion of this represents commitments to assets that are not yet operational and cash-generative, so we are still some distance away from full coverage of ROOF’s dividend. If I were investing for income, this is not a fund that I would pick, but it should at least be on a firmer footing at some point next year.

GSEO departure

VH Global Sustainable Energy Opportunities (GSEO ) is a few months older than ROOF, having launched in February 2021. It yields 7% and trades on a near 28% discount. GSEO was much quicker off the mark to get its IPO proceeds invested with 92% deployed or committed by September 2021. By the end of June 2022, GSEO’s dividends were covered by cash flow and, at the beginning of this year its board felt able to hike the dividend by 10%.

Early in August 2023, GSEO said that its dividend was 1.3 times covered and that it expected that to strengthen as more of its portfolio became operational. This is all encouraging stuff, but investors were unnerved by the early departure of the lead manager Anthony Catachanas in July. This might impact on the fund’s ability to close its discount, but it does not explain why it should be wider than ROOF’s, given the progress it has made. Witan (WTAN ) disclosed a stake last month.

BSIF’s good record

The contrast with the next-higher yielding fund, Bluefield Solar Income (BSIF ) could not be greater. BSIF has a 10-year track record of producing an average underlying total return from net assets of more than 10%, the second highest in the sector after Greencoat UK Wind (UKW ).

BSIF shares offer investors a prospective yield of 7.4% and discount of 17.6%. BSIF was also one of very few renewable energy funds to announce an uplift in its NAV at 30 June. That NAV uplift came despite a 0.75% increase in the discount rate used to work out the net present value of BSIF’s future cash flows. BSIF is now using a weighted average discount rate of 8%, which looks sensible to me relative to yields of about 4.6% on 30-year UK government bonds. 

For the financial year to 30 June, BSIF aimed to generate 8.4p in total dividends per share, and with three quarterly payouts declared it is a safe bet the target will be met. Moreover, the company expects the dividend will be covered twice by earnings after servicing its debt, with substantial earnings growth to follow over the next two years. This is not the sort of confident statement that companies make lightly.

When BSIF announces its results at the end of September, it may turn out that this dividend cover estimate will be conservative. BSIF has been able to achieve this by locking in some of the higher power prices that we saw earlier this year and last, which gives its board good visibility on BSIF’s future cash flows.

Higher-than-expected inflation is a net positive too, as this feeds through into the subsidy income BSIF earns. Another feather in BSIF’s cap was locking in low interest rates through an interest rate swap.

Apart from the actual level of dividend cover, one other key message in the results will be the board’s new dividend target for the current financial year. In recent years, BSIF has hiked its dividend by about 2.5% a year on average. The high level of dividend cover for the June 2023 financial year might encourage the board towards a bigger increase this time or it might choose to use the surplus cashflow to help fund the company’s sizeable investment pipeline.

At the end of March 2023, BSIF had about 390MW of solar and 125MW of energy storage in construction-ready projects. Building projects can enhance NAV as they are revalued upwards once they are completed and energised and therefore substantially de-risked. Beyond that, BSIF also had solar projects in planning and substantially more solar and energy storage projects in development.

If dividend yield is the main attraction of these three renewable energy funds, it clearly does not make sense that the one with the longest track record, highest dividend cover and good prospects is trading on the highest yield.

James Carthew is head of research at QuotedData.

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