Ian Cowie: inflation-busting income, but my timing was terrible

Call me cynical, if you like, but there is money to be made in climate change. Investment trusts trading at double-digit discounts to their net asset value (NAV) could even help investors cope with man-made disruption, such as Donald Trump’s on-off tariff-based trade wars.

Storm Eowyn, the latest in a series of extreme weather events around the world, caused damage across Europe last month that will cost millions to repair. Falling trees cut electricity supplies to more than 200,000 homes in the UK for over a week.

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But it’s an ill wind that blows no good and those 114-mile per hour gales blasted Britain’s 11,000 wind turbines, boosting their power output close to a record 30 gigawatts maximum capacity. As a result, we exported electricity to our Continental cousins via undersea cables.

An embarrassment of electricity - and very limited means to store it for any length of time - meant our friends in France had to reduce the power they produce by 4 gigawatts to keep the system balanced, according to Montel Energy Analytics. The French normally have 18 nuclear power plants switched on, out of an operational fleet of 57 reactors. By contrast, Britain has just five nuclear reactors, despite all the hot air from “going for growth” Chancellor Rachel Reeves.

Never mind the macroeconomic statistics or the political knockabout. How can investors plug into all this excitement, for income and growth from the great transition away from dirty fossil fuels to cleaner, greener energy?

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Step forward Greencoat UK Wind (LSE:UKW), the self-descriptive £4.5 billion investment trust that yields an eye-popping 8.6% dividend income. Better still, shareholders’ pay surged higher by an average of 7.6% per annum over the past five years, according to independent statisticians Morningstar.

It is important to beware that dividends can be cut or cancelled without notice and the past is not necessarily a guide to the future. Even so, it remains a mathematical fact that if UKW could sustain its inflation-busting dividend hikes at their current rate, it would double shareholders’ income in less than a decade.

Against all that, UKW has been blighted by political interference from both major parties, with the Conservatives imposing an idiotic “windfall tax” that the current Labour government cheerfully continues to pocket. Two years ago, the Tories bungled an offshore wind licensing auction so badly that the government didn’t receive a single bid.

Then there are the climate-change deniers who hanker for the days before “nanny state” clean air acts and London’s choking pea-soupers, which this old boy can still remember stumbling through on the way to primary school. But I don’t suppose there are quite so many climate-change deniers in California or Cumbria, these days.

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Here and now, UKW’s capital performance has been shocking, slumping by -10% over the last year. That depressed the shares to trade -21% below their NAV, which might attract the attention of bargain-hunting, income-seekers.

Over a one-year view, I would have been much better off with the Association of Investment Companies (AIC) “Renewable Energy Infrastructure” sector leader, Triple Point Energy Transition Ord (LSE:TENT). This is pumping out 12.2% income, albeit with no five-year track record, having been launched in 2020, and continues to trade 43% below NAV. But this £82 million tiddler might be producing potentially misleading readings because it is in the process of being wound up.

Similarly, the problem with the second-best fund in this sector over the last year, Harmony Energy Income Trust Ord (LSE:HEIT), is that it doesn’t produce any dividends. According to independent statisticians Morningstar, there aren’t any dividends from this £266 million fund launched in 2021. That might explain why HEIT trades -32% below its NAV, after producing a total return of 8.5% last year.

Look a little further back and the clouds clear to reveal that UKW was the top performer over the past five years and decade among 20 investment trusts in its AIC sector. It delivered total returns of 13% and 99% over the medium and long term.

Sad to say, my timing was terrible, having paid £1.45 in August 2023 for UKW shares, which I popped in my ISA for tax-free income. Helped by the fund managers Schroders Greencoat rubbing along on charges of 0.92%, the high and rising dividend yield goes some way to compensate me for a short-term capital loss, with the shares trading at £1.20 this week.

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Those figures demonstrate how these formerly fashionable funds have fallen from favour, which might spark the attention of contrarian bargain-hunters.

If Trump’s trade war pushes up retail prices and defers interest rate cuts, it might even make shares that can deliver inflation-busting income more attractive again. Well, this clean-air Cockney lives in hope. Blow me down, strike a light, guv’nor!

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Greencoat UK Wind (UKW) as part of a globally diversified portfolio of investment trusts and other shares.