Ian Cowie: a tale of two ‘green’ trusts, but I’m keeping the faith

How do you fancy nearly 9.2% dividend income, rising by 7.6% per annum from an investment trust that leads its sector over the past decade and five-year periods but is priced 25% below its net asset value (NAV)?

You won’t be surprised to learn that this fund currently trades under clouds of uncertainty, both macroeconomic and purely personal. But it might “do the double” and benefit in terms of income and capital if the sun comes out.

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Greencoat UK Wind (LSE:UKW), a self-descriptive renewable energy fund with £4.48 billion assets, has suffered in recent years from rising interest rates, which meant income-seekers could obtain similar returns with less risk elsewhere. The departure of one of its founding fund managers last year and the imminent exit of another hasn’t helped, as recently reported by interactive investor.

However, UKW remains the fourth-most valuable holding in my ISA and I intend to continue building this stake for rising tax-free income. It’s important to be aware that dividends are not guaranteed and can be cut without notice.

More positively, this investment trust has managed to increase shareholders’ income at least in line with the Retail Prices Index (RPI) measure of inflation every year since it launched in March 2013. Looking forward, if it can sustain payouts’ current rate of ascent, it would double its dividends in just under a decade.

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Most recently, UKW delivered a “negative return” - or, in plain English, a loss - of 12% over the past year, which might represent a buying opportunity for those who believe in the tendency for performance to revert to the medium and long-term means or averages. UKW generated positive total returns of 27% over the past five years and 83% over the past decade.

Against all that, many people hate wind farms and question whether renewable energy is really sustainable. Lots of carbon dioxide is released into the atmosphere when the turbines are manufactured and there are questions about how long they will last before repair costs become prohibitive.

Similar doubts overshadow solar energy. I’m not going to get into that debate, which often generates more heat than light, but will point out that wind and solar created more electricity in the world’s largest economy than coal for the first time last year.

Despite the enthusiasm of the American president, Donald Trump, for fossil fuels - summed up in his catchphrase “Drill, baby, drill” - the US Energy Information Administration reported earlier this month that wind and solar generated 17% of that country’s electricity. By contrast, coal made only 15% with its contribution having halved since 2017.

Most of the growth in renewables came from solar, which is why my biggest exposure to “green power” comes from a more diversified investment trust, Ecofin Global Utilities & Infra Ord (LSE:EGL), which yields 4.3% dividend income, rising by 5% per annum. Underlying assets include NextEra Energy Inc (NYSE:NEE), the American giant that claims to be the biggest renewable power producer in the world, plus Britain’s National Grid (LSE:NG.), Italy’s Enel SpA (MTA:ENEL) and Germany’s RWE AG Class A (XETRA:RWE).

While EGL is much smaller than UKW, with the former having assets of just under £265 million, it delivered bigger total returns of 27% over the past year and 88% over five years but lacks decade-long data, having been relaunched in 2016. I first invested in it more than a decade ago, when it was called Ecofin Water & Power Opportunities (EWPO).

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Here and now, many “green” investors might be put off EGL by its biggest underlying holding in Vistra Corp (NYSE:VST), which - like another top 10 asset, Constellation Energy Corp (NASDAQ:CEG) - has extensive exposure to nuclear power. But that diversified portfolio suits my personal approach to energy, which also includes the oil and gas giant Exxon Mobil Corp (NYSE:XOM), the hydrogen electrolyser-maker ITM Power (LSE:ITM) and the uranium specialist Yellow Cake Ordinary Shares (LSE:YCA).

While keyboard warriors prefer to go all in, one way or the other, in the fossil fuels versus renewable debate, this long-term investor prefers a more balanced approach to allocating my life savings. That way, I hope to generate capital growth and a decent income while we wait to see who’s right about which forms of energy will power the economy of tomorrow.

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

Ian Cowie is a shareholder in Ecofin Global Utilities and Infrastructure (EGL), Exxon Mobil (XOM), Greencoat UK Wind (UKW), ITM Power (ITM) and Yellow Cake (YCA) as part of a diversified portfolio of investment trusts and other shares.