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A double-digit dividend yield is a rare thing. It can also be a red flag for investors, although in some cases high-yield shares go on pumping out dividends for the long term. A few FTSE 250 shares offer yields north of 10% right now.
For example, Bluefield Solar Income Fund (LSE: BSIF) yields 10.2%. Meanwhile, Foresight Solar Fund (LSE: FSFL) is yielding 10.1%.
Am I missing out by not owning any solar fund shares?
Taking the long-term approach
The short-term answer is: yes, I am.
Owning a 10%+ yielding share helps boost my passive income streams. I do own at least one, but not Foresight Solar Fund.
Over the past few years, Foresight has grown its dividend per share annually. It pays dividends quarterly. From a passive income perspective, that can be attractive compared to less frequent payouts.
But while I am missing out on dividends, what about capital growth?
Here the picture is less appealing. Over the past five years, the Foresight Solar Fund share price has fallen 25%.
Coincidentally, the share currently sells for 25% less than its net asset value.
Some red flags
Hang on, though.
Why would a share sell for a quarter less than its net asset value?
After all, the shareholders could simply vote to wind the company up, sell the assets, and recoup substantially more money than their shares are currently worth.
In theory, they could. In practice, though, things tend to be more complicated than that.
Trying to realise a company’s asset value is notoriously difficult. Who is to say that if Foresight Solar Fund tried to realise cash by selling its assets it would be able to obtain the valuation at which they are carried on its balance sheet?
That 25% discount is something of a red flag for me, along with the long-term decline in the share price despite steady dividend growth. Clearly, some investors are looking beyond the juicy dividend yield to the long-term prospects for the fund.
A sector ripe for change
Foresight Solar Income Fund management is well aware of this.
It has also been wrestling with possible explanations for why solar funds like itself trade below their net asset value. It has also raised the prospect of mergers and acquisitions in the sector.
That could potentially help unlock some value in the sector.
Then again, it could be bad news. After all, lowball takeover bids can potentially destroy value for many shareholders – something I am currently experiencing with my investment in Treatt.
I don’t like the uncertainty
Foresight Solar Income Fund has been steadily buying back its own shares lately. Doing that well below net asset value ought to help create value for shareholders.
The bigger question is whether solar income funds like those run by Bluefield and Foresight have a viable long-term business model. Volatile energy prices and changing weather patterns are risks for both.
With Foresight Solar Income Fund set to report its interim results this Thursday (18 September), we should hear management’s current thinking about the prospects for the sector.
But I do not like the question marks over the business model implied by the large discounts to net asset value of both these FTSE 250 shares (Bluefield Solar Income trades on a 26% discount). I will not be investing in either.
