Obtaining a high dividend yield can be a much better way to gain a second stream of income compared to buy-to-let. The latter solution is undoubtedly a viable strategy. However, it requires much more effort and attention.

After all, purchasing real estate for rent requires the investor to become a lessor who is responsible for finding a tenant, collecting rent, paying for renovations, and purchasing a mortgage, which is currently quite pricey.

Alternatively, all this can be handed over to a team of professionals at very little cost, thanks to real estate investment trusts (REITs). These companies are listed on the stock exchange like other stocks. By owning them for the long term, shareholders can enjoy a steady stream of high-yielding dividends without taking on debt.

Looking at your own portfolio, Greencoat wind in the UK(LSE:UKW) is a perfect example of what I consider a great and reliable source of income. This is why.

A future dividend aristocrat?

There are many different types of REITs. Some focus on debt markets, buying mortgages from the private sector and collecting interest. However, most of them focus on equity, investing in real estate and collecting rent. Greencoat is an example of the latter. However, instead of buying parking lots, office buildings or warehouses, the company specializes in wind farms. In fact, it is the UK’s largest listed wind farm owner.

The turbines produce electricity that is sold to the power grid, creating a rent-like income stream that is used to fund a 7.3% dividend yield. As far as business models go, it’s pretty straightforward. However, its focus on renewable energy is what makes Greencoat so promising.

The barriers to entry for energy infrastructure are much higher compared to residential or commercial real estate. At the same time, the demand for pristine electricity is growing rapidly as the electrification of vehicles and homes accelerates.

This trend is unlikely to change over the decades. This is a powerful tailwind for this company that it can take advantage of. In fact, Greencoat appears to be already doing this. Steady cash flow growth has resulted in nine consecutive years of dividend increases at an average growth rate of 8.7%. In other words, the company is well on its way to becoming a dividend aristocrat.

Every business has its weaknesses

The ability to generate income for this company is obvious. However, as with any investment, there is always risk. And Greencoat is no exception.

Operating in the energy sector, the company is subject to the same regulations as other energy companies. This includes price caps imposed by regulator Ofgem. And with electricity prices determined by the market, Greencoat ultimately has no influence on pricing.

Relatively speaking, turbines do not require much maintenance and rarely break down. However, regular inspections are required, which burdens the company primarily with fixed costs. It’s a bit of a double-edged sword. When electricity prices are high, Greencoat’s profit margins can also reach extremely high levels. In fact, in 2022, the operating margin reached approximately 95%!

Today, energy prices have fallen, reducing the group’s margins to 83%. This is still nothing to joke about. However, this shows how sensitive Greencoat is to energy prices. If they continue to decline, margins will enhance, putting pressure on dividends.

However, having had excellent experience in dealing with energy price fluctuations, I believe this is a risk worth taking for my portfolio.