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Dividend stocks with double-digit yields draw in a lot of investor attention. And right now, Bluefield Solar Income Fund (LSE:BSIF) wears the crown for the highest payout in the FTSE 250.
With a yield of 12.71% and the shares trading at a near-30% discount to their net asset value, there could be a potentially lucrative opportunity for both income and value investors here. So is this a passive income goldmine? Or is it a trap?
Going against the crowd
This business invests in a diverse portfolio of renewable energy infrastructure projects consisting of 93% solar farms and 7% wind farms across the UK. But investor sentiment surrounding renewable energy companies is fairly weak at the moment.
Pressure on energy prices, uncertain future political support, and higher interest rates are proving to be a nasty combo for many companies operating in this sector. And Bluefieldâs no exception.
But as all experienced investors know, taking a contrarian approach to the stock market can deliver some phenomenal long-term results. Why? Because some of the best buying opportunities are often found among the least popular businesses and sectors.
Of course, this strategy only works if thereâs hidden value. So is Bluefield hiding something special?
Passive income potential
Bluefield makes its money by selling clean electricity generated by its portfolio of assets. Since energy prices move in line with inflation, its profits have similarly followed. And with the bulk of these inflation-linked earnings paid out to shareholders, dividends have been hiked annually for the last eight years.
Looking at its latest results, this trend seems set to continue. When stripping out the non-cash costs of valuation changes in its assets, the underlying profits after debt payments stand at £61.8m. While thatâs slightly lower compared to the £64.5m reported in 2024, itâs still more than enough to cover the £54m in dividends paid.
In other words, even with a doube-digit yield, shareholder payouts remain affordable. The dividend coverage is tight at around 1.2. However, with further interest rate cuts expected throughout 2026, the amount of free cash flow gobbled up by Bluefieldâs outstanding debts is expected to fall. This would improve the coverage ratio and make room for even more payout hikes.
Whatâs the problem?
On the surface, Bluefieldâs dividend seems set to continue climbing. But digging deeper, investors might have a good reason to be cautious.
Even with management executing a strategic refinancing of its outstanding loans, the group still has £134.9m of borrowings maturing in May 2027.
Given the groupâs already excessive gearing of 45.7%, finding a lender offering a low rate seems likely to be a challenge. And with equity investors showing little interest in the renewable sector, thereâs a good chance Bluefield might be forced to sell some of its assets at a discount to cover this upcoming cost.
In this scenario, with fewer assets generating cash flow, dividends might be vulnerable to a payout cut after all.
With that in mind, while I remain confident there are hidden value opportunities within the renewable energy space in 2025, Iâm not convinced Bluefield sits among them. Thatâs why, even with a double-digit yield, Iâm not buying any shares.
The post This dividend stock yields 12.71% and is potentially 30% undervalued! appeared first on The Motley Fool UK.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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