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Hi Dadean,
I should have mentioned that I also invest in Greencoat UKW, about the same amount as in NESF. Obviously, wind is different from solar and UKW has a higher dividend cover and a stronger commitment to increase future dividends in line with RPI. That said, the current dividend yield on NESF is so high that it would be a good investment without any future dividend increases.
As both NESF and UKW are exposed to electricity prices, I consider SEQI to be a more risk-diversified fund than either. SEQI is currently my largest investment.
Hello Dadean,
The dividend cover was barely 1.0 2-3 years ago when the share price was over 100p. I think the one of the differences with UKW is that NESF invests more in projects under construction, which is riskier than investing in operating assets, but produces sudden uplifts in projected revenues when the assets become operational. Another difference is that more of NESF's future revenues from electricity sales are hedged through long-term contracts, which is less risky but less profitable when prices are rising. As regards debt, half of NESF's gearing is from a preference share issue at a fixed 4.75p dividend per share, which has turned out to be a very good decision. Reducing RCF gearing must be because of higher interest rates and the fact that NESF's future revenue stream may now be riskier because of its battery investments.
Hello Everyone,
I have done my own calculations to examine whether AAIF is, to some extent, using the dubious approach of HFEL to boost its dividend income. Many thanks to ade2a for raising this important issue and doing his own calculations.
The first questions is what the underlying dividend yield on AAIF's stock portfolio is. I have calculated the weighted average dividend yield for all 58 stocks listed in the Annual Report to be 4.45%, which is a little higher than ade2a's figure based on the top 10 stocks. There is a huge variation in dividend yields, with many of the lower-weighting stocks having very high yields that pull up the average.
The next step is to calculate how much annual dividend income these stocks would have generated on a buy-and-hold basis. The market value of the stock portfolio at the end of 2023 was £430m, so the expected income on a buy-and hold basis would have been $430m x 4.45% = £19.1m.
Now let's compare this figure with the actual dividend income given in the Income statement for 2023. This was a higher figure £23.3m. Hence AAIF somehow generated an extra £4.2m of dividend income through its transactions in 2023. I'm afraid there is no other explanation than the same "dividend-washing" tactics of HFEL. The annual capital depreciation resulting from this approach is given by £4.2m / 430m, i.e. close to 1%.
In addition to this, the Capital column of the income statement indicates that £1.83m of the investment management fee is deducted from capital rather than income. This gives a total figure for annual capital depreciation of:
(4.2 + 1.83) / 430 = 1.4%
CONCLUSION
AAIF is generating additional dividend income by buying shares cum dividend and selling them ex-dividend (aka "dividend--washing"). Along with the management fee, this will results in a drag of 1.4% per annum on growth in future dividend income. In other words, the underlying dividend income on the portfolio needs to grow by 1.4% per annum just to maintain same dividend per AAIF share.
Now converting capital growth into dividend-income might be quite a sensible thing to do. I would prefer to have a dividend yield of 5.4% per annum growing at the rate of inflation than a 4% dividend yield growing at 1.4% above the rate of inflation. But the use of a covert dividend-washing strategy is not acceptable in my view. The AAIF fund managers need to come clean about what they are doing and justify their approach, explaining why it is preferable to writing call options on the shares they hold, which does not require a large turnover of the portfolio.
Lastly, we should not forget that AAIF is trading at a 14% discount to net asset value. This is creating a 0.8% increase in dividend yield which offsets most of the management fee. For this reason alone, I won't be selling my AAIF shares right now.
I have about 40% of my portfolio renewable energy investment trusts, but that's because I'm semi-retired and need an income from my portfolio. Younger investors are in a different situation, but renewable trusts are still worth investing in because they look so undervalued. If your portfolio is normally 60/40 equities to bonds, I'd change that to 60/30/10 equities, bonds, renewables.
Hello Zzzz91,
There are other high yielding investment trusts (e.g. NESF) with even more baffling prices.
I think prices will rebound when there is greater certainty about expected interest rate cuts.
When December's CPI figure came in lower than expected there was a rapid price rebound which reversed when January's CPI figure came in higher than expected.
March 20 is the date of the next CPI release, when the annual inflation rate is very likely to drop significantly. Let's see what happens then.
The share prices of all renewable energy and infrastructure trusts have fallen. Higher interest rates are sucking liquidity out of the market and the broad money supply is contracting. Government bonds are soaking up the available cash. Things could change pretty quickly when interest rates start falling.
I think the montly inflation figures and what they mean for interest rate cuts are the key. The surprise fall to 3.9% announced in December led to a surge in the share price, which has since been more than reversed following the surprise increase to 4% in January. Nothing happening in energy market explains these price movements.
Hello Tichtich,
A consequence of not being able to issue more shares is that UKW (and other renewable trusts) be will less able to invest in new assets to replace those that are ageing and reaching the end of their useful lives. If this continues, the cash earnings will eventually fall and shrink to zero when all the assets are scrapped.
This doesn't mean shareholder returns will be less than forecast - but it does mean part of the dividend income will effectively be a repayment of capital.
Perhaps this explains why the accounts are now showing depreciation as a separate item. If old assets are not being replaced, the average useful life of the asset portfolio would be falling.
However, I am inclined to believe that the share price discount will revert back to a premium when interest rates fall, which will allow the trust to issue new shares to buy new assets.
Depends what you're looking for, barchid. For someone who needs income from their investments, the AAIF dividend has grown over the last 10 years from 7.9p per share to 11.75p per share, which is more than the increase in the CPI over the same period. Investing for growth can produce great returns, but market volatility works against drawing a regular income from growth stocks. Maybe it doesn't matter if you know when to take profits.
Fair point, here are the dividend yields on the top 10 holdings.
Taiwan semiconductor - 2.35% (7.4% portfolio weight)
Samsung Electronics preferred stock - unknown div yield (5.3%)
BHP - 5.37% (3.5%)
DBS - 5.57% (3.4%)
OCBC - 6.22% (3.3%)
Powergrid - 4.37% (3.2%)
Foxconn - 3.15% (3%)
Venture - 5.47% (2.8%)
Charter Hall - 3.7% (2.4%)
China Resources Land 6.65% (2.4%)
If we ignore Samsung, the weighted average dividend yield is 4.43% for 9 stocks that make up 31% of the portfolio. I think it's plausible that the rest of the portfolio would take the yield above 5%, but it's a pity they don't state the underlying portfolio yield.
Hello ade2a,
I'll look forward to the results of your investigation. The managers' statement about dividend coverage is far more plausible for AAIF than HFEL. The net asset value of the trust is 230p, implying a dividend yield of slightly over 5% on net assets. DamienMoore's comments would also be of interest.
Hi Daminemoore,
Well at least they have now admitted to artifically boosting dividend income by "rebalancing" the portfolio in cum dividend stocks (thus causing capital depreciation). Thank you again for alterting me to this destructive strategy, which prompted me to sell my holdings in January.
NESF is in a better position than other funds regarding refinancing of debt because it made a large preference share issue with a fixed dividend of 4.75p per share. This issue is not redeemable, so will not need to be financed.
Unlike the Renewable Energy Funds, HICL has hardly increased its dividend over the past few years, and GCP has no plans to increase its dividend at all. Anyone who buys UKW at the current price is not going to regret it.
Hi Damianmoore,
Thanks for the link. I think the writing is on the wall for this Trust, although when the inevitable dividend cut occurs is anyone's guess.
I'm thinking of constructing a simple two share model to illustrate how dividend-washing works. Assume each share pays the same annual dividend, but at different dates in the year. Further assume there is no underlying captial growth, so the XD price of each share remains fixed at 100p. Consider a strategy where the fund manager invests in one share which is sold just after the XD date, then re-invests in the other share which is sold just after the XD date, and keeps repeating. This will generate twice as much dividend income as the underlying yield on each share, but number of shares held (and the capital value of the fund) will slowly but steadily decline.
Dear Damienmoore,
I would like to thank you for alerting me to HFEL's damaging dividend-washing strategy. For some time, I had wondered how the fund had a distribution yield significantly higher than the underlying yield on its portfolio, and decieived myself that it was explained by option-writing or leverage. Thanks to you, I sold my shares 287p and saved myself further captital losses. Please continue to post here - you are performing a public service and may discourage unwary investors from buying HFEL shares.
At some point, HFEL will be forced to cut its dividend. The dividend yield on the unit trust equivent of HFEL (Henderson Asian Dividend Income) is already much lower, because a unit trust has no reserves and can only distribute income. I occasionally visit this board for the same reason that a psychologist might be interested in the behaviour of passengers aboad the Titanic. It gives me no pleasure.
The underlying dividend yield on the fund's assets is lower than the dividend yield distributed to the fund's shareholders. This underlying yield has been stated (without comment) in the annual report. The only way of achieving the higher distribution yield is through "dividend-washing" and other strategies that convert capital into income. Thus, the poor capital performance of HFEL compared to other Asian funds, e.g. AAIF.
Hello hghotshot,
This is all true, but there was also an abrupt fall in NAV (of about 2p) in March which I suspect was a loan default. There needs to be more transparency on defaults given that it's the only real risk (apart from inflation).