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Leaving money in a high-interest savings account can be a good option for investors, given the capital protection. However, dividend stocks can offer significantly higher yields to compensate for the higher level of risk. The skill is found in deciding which shares are worth the risk. Here are two that I believe are worth considering.
Renewable energy spark
The first is the Bluefield Solar Income Fund (LSE:BSIF). Over the past year, the stock has fallen by 9%, with a current dividend yield of 9.12%.
The UK-based investment company focuses on generating long-term income for investors by investing in renewable energy assets, primarily solar energy installations. It owns and operates a portfolio of solar farms, generating money by selling the electricity, as well as benefitting from government grants and subsidies.
It has a strong track record of paying out income, having done so on a consistent quarterly basis for over a decade. The business model suits it well, given that the electricity supply contracts it has in place offer predictable cash flow. In the interim results from February, the dividend cover was 1.5. This means the current earnings can easily cover the dividend payments, with funds left over. This bodes well for the future.
Of course, one risk is the fluctuations in the electricity price. It’s a commodity, just like oil and gold, so demand and supply can cause large price movements. If power prices fall significantly, it would negatively impact revenue.
Funding mainstream projects
A second option is GCP Infrastructure Investments (LSE:GCP), which currently has a very generous yield of 9.75%. This is well above the UK base rate of 4.5%.
The stock is down a modest 4% in the last year, with it trading at a high 31% discount to the net asset value (NAV). This refers to the value of the assets within the fund, in comparison to the stock price. Over the long term, these two figures should match up, but differences can exist in the short term. The fact that the share price is so far below the NAV can indicate that the company is undervalued.
Within the fund, it generates income by providing loans to entities involved in UK infrastructure projects. These loans are typically secured against cash flows backed by the UK public sector, such as payments from government departments, local authorities, or NHS trusts. As a result, I believe the dividend payments are relatively safe, given the reliability of the debtors.
The risk some might have on their mind is that providing any form of loan means that there’s potential for defaults. Given the size of some of the projects, even one default has the potential to significantly impact the operation of the business.
Due to the 9%+ dividend yields, I think both stocks fairly compensate an investor for the associated risks. Therefore, investors who are considering adding income shares to their portfolio may want to consider including these two.
