Infrastructure funds are not the ‘bond proxies’ they once were when interest rates were near zero which is why the likes of Octopus Renewables Infrastructure (ORIT ) are bending over backwards to emphasise their income credentials.

Shares in the £619m portfolio, which trail at a discount of around 16% below net asset value (NAV) following the surge in government bond yields last year, got a boost yesterday when the investment trust used its annual results to forecast strong cover for its dividends in the next five years.

ORIT is this year targeting a distribution of 5.79p per share, having lifted the target by 10.5% in January in line with the consumer prices index. Although the company has a progressive rather than inflation-linked dividend policy, this is the second year in a row it has raised the target in line with the cost of living. At a share price of 92p, 8p below the December 2019 launch price, that offers a dividend yield of 6%, some 2.5% over UK gilts.

Such is the strength of the cash flows coming off its operational wind and solar farms in the UK and Europe, the company expects its earnings after debt costs will cover the quarterly dividends by 1.7 times this year and all the way up to 2027.

Just to ram home the point that the payout is secure, ORIT said the fixed price power contracts it has in place on their own were sufficient to cover the dividends by 1.1 times in the five-year period.

For this year and next, ORIT says fixed price contracts will generate 68% of its forecast operational revenues, up from 50% at the end of 2022.

The company doesn’t just want to be known as a ‘yieldco’, however. It also wants to provide capital growth through building wind and solar parks. Construction assets accounted for 26% of the portfolio last June but had fallen to 12% by 31 December after acquisitions of operational projects in the UK and Germany.

Fund manager David Bird told me the assets under construction would be entirely operational by September which is why the company was flagging up that it would ‘consider opportunistic disposals where appropriate to recycle the capital’. 

Bird said the company wanted shareholders to be clear that even if the proportion of non-revenue generating construction projects rose again, depressing dividend cover, there would still be sufficient to make the targeted payouts.

With its stock trading on a double-digit discount like many of its peers, ORIT is unable to raise new money from share issues. However, with £10.6m of cash at year-end and about £180m left on its credit facility, Bird said the closed-end fund had enough to meet its commitments.

High energy prices and inflation saw ORIT achieve a total return on net assets of 12.3% last year, up 2.2% in the troubled fourth quarter when rising gilt yields cast a cloud over the valuation of infrastructure funds. In response ORIT lifted the discount rate with which it values future cash flows from 6.5% to 7.5%. 

Although the shares have shed 12% in the past year, and are below their launch price, up from flotation to the end of last year the company said it had generated a total return including dividends of 12.1%, which it believed was ‘robust.

That might not be as much as investors would have wanted, but at least it comes with the reassurance that this fund, like its peers, has a positive environmental impact. Once fully invested, ORIT says its assets could power the equivalent of 522,000 homes with clean energy and avoid an estimated 580,000 tonnes of carbon emissions.