There are several investing strategies to earn a second income. Some people pursue snail-paced but sure gains over the long term. Others pursue high returns on undervalued stocks with growth potential.

I think buying high yielding stocks and reinvesting the dividends to escalate profits is a good strategy. While some of the highest yields reach 15% or more, they are not necessarily foolproof. It’s best to choose stocks that have a long history of making payments and increasing profitability.

A good example is Greencoat wind in the UK (LSE: UKW), a FTSE250 a real estate investment trust (REIT) that invests in the renewable energy sector. REITs provide individual shareholders with a 20% tax break.

Please note that tax treatment depends on each client’s individual situation and may change in the future. The content of this article is for informational purposes only. It is not intended to be and does not constitute any form of tax advice.

Harnessing the power of the wind

Greencoat wind in the UK specializes in wind farms on land and at sea. With renewable energy on track to meet its goal of tripling its capacity by 2030, demand for wind energy is expected to remain high. The company’s assets already supply 10Mw of power to UK homes, and last month it signed a novel 10-year power purchase agreement (PPA) for the Ballybane Phase 1 wind farm.

At a dividend yield of 7.5%, this is double the average FTSE 250 yield of 3.23%. The company has been paying dividends consistently for over 10 years, most often at the level of 5-6%. However, the share price of £1.35 hasn’t changed much in five years, apart from a brief rise in 2022. That wouldn’t worry me too much though. This is quite common with income stocks that focus on providing profits in the form of dividends.

Finance and risk

Although the trust’s dividends are consistent and reliable, profits and revenues have been failing. Forecasts indicate that it may prove unprofitable next year. With increasing investments driving the share price higher, the price-to-earnings (P/E) ratio is now 25 times. This is significantly higher than the industry average of 16.8.

This also means that earnings per share (EPS) have fallen to 5.5p, well below the current dividend of 13.7p. As a result, yields may be reduced this year or next. However, based on previous 10 years of experience, payments should remain consistent.

The most vital thing

Greencoat UK Wind has a solid balance sheet that appears stable enough to weather a period of losses. Its debt of £1.8b is well covered by equity and its assets far outweigh its liabilities. The debt-to-equity (D/E) ratio is 47% and the interest coverage is 3.1 times.

Thanks to mighty industry growth and exceptional track record, I believe the trust will continue to pay reliable dividends into the indefinite future. And I’m not alone. On May 22 Barclays adopted an overweight position on the stock, indicating that it believes the stock will outperform the sector average over the next eight to 12 months.

Therefore, I believe it would be a great addition to a dividend portfolio aimed at building a second source of income. If I invested £20,000 in a portfolio with an average return of 7% and an annual price escalate of 2%, it could grow to almost £400,000 over 30 years. This is not guaranteed, but this amount would provide a second dividend income of £34,500 per year.