Energy giants such as Shell and BP were former staples for UK equity income portfolios, but now that their future grows increasingly uncertain, income-seeking investors are now under pressure as a result of the changes.
Renewable energy investments could prove to be a good alternative, not just because they are ‘green’ and environmentally friendly, but because they generate resilient dividends.
Chris Greenland, manager at Sanlam Investments, said: “Thanks to their strong financial profiles, lower correlation to equities, and resilient capital preservation characteristics, real assets are holding up well in these rather uncertain and unpredictable times.
“As a result, their stable dividends are likely to become attractive to income investors, given they have been let down by other parts of the market.”
Greenland (pictured) has observed that dividend policies for both infrastructure and renewable energy have so far “been largely resilient”. 
He explained: “Many infrastructure and renewable energy businesses benefit from contractual revenues in the form of long-term concessions, long-term power purchase agreements (PPAs), state subsidies, inflation-linked and upward-only leases, ‘take-or-pay’ contracts and rent guarantees.
“All of these provide visibility and predictability. Wind blows, the sun shines and dividends remain unaffected.”
In the past, a high proportion of dividend income from the FTSE 100 has been generated by oil companies, miners, cigarette manufactures and banks, who generally boasted high dividend cover before the crisis.
However, James Smith, manager of the £55m Premier Miton Global Infrastructure Trust, questioned whether dividend cover is fit for purpose, arguing that genuine analysis of the business models of the company in question is more appropriate.
He asked: “How sensitive are their revenues to changes in GDP or commodity prices? How likely are they to be disrupted by technological change? Do these companies contribute to the global environment and personal wellbeing or do they actively harm it?”
He said an over-reliance on dividend cover led to a misunderstanding of dividend risks, as seen in 2020 when the coronavirus pandemic saw many company earnings drop to zero.
“What matters most in reality, particularly over the medium to long term, is cash flow,” he said. After all, companies go bust when they run out of cash, not when they run out of earnings. In addition, it takes no account of profitability.”
By comparison, Smith said renewable energy companies score very well on dividend resilience for two major reasons.
“Firstly, and most importantly, the sales volume of renewable energy companies is not particularly sensitive to movements in demand because renewable energy generated from the wind, the sun, or rainfall has little or no marginal cost,” he said. “It is usually dispatched by grid operators in preference to thermal generation, benefiting from what is known as ‘priority offtake’.
“Secondly, on a global view, most renewable energy is sold on fixed price contracts to corporate buyers or on fixed feed-in tariffs to government agencies. Essentially priority offtake mitigates volume risks, while the counterparty buying the power takes on the pricing risk.”
When the renewable energy sector sold down heavily in February amidst the broad sell offs, Smith increased his allocation during the dislocation and has as a result more than doubled his holding in renewables since before the crisis.
“Renewables are very good at insulating an investor from movements in global GDP,” he said. “The output of renewables fluctuates with weather, but it doesn’t fluctuate that much with market conditions.”
Having said that, the manager admitted UK-based renewable energy firms carry some degree of pricing risk exposure.
In the UK, renewables typically sell power in the wholesale electricity market, which makes up around 40 per cent to 50 cent of revenue, while receiving a renewable obligation certificate (ROC) covering the remainder.
Smith (pictured) said: “While the ROC has the benefit of indexation and legislative backing to its value, there is material market risk when it comes to wholesale power market sales.” 
He also pointed out that after 20 years, a project ceases to qualify for ROCs, after which all its revenue will be generated from the wholesale power market.
This contrasts to the US, where renewable energy firms sell output on a fixed price long-term tariff to the local utility.
“As an investor that gives you fantastic visibility because they would have a contract with a utility company who will, for example, buy every megawatt hour they produce at $45 per megawatt hour increasing at half a dollar per year for the next 25 years,” he said.
“So, its basically a bond. Your risk there is purely weather.”
He prefers foreign renewable energy firms over UK firms because they don’t have the power price exposure.
The main price exposure renewable energy firms face is decline electricity prices, however, despite the slow and gradual decline in prices seen over the last few years, Smith believes that renewable energy sources will be a beneficiary of the future electrification of the global economy.
“For what it is worth, I expect power prices to recover over time as the electrification of the economy gathers pace, older thermal and nuclear stations are closed, and further out, as renewable energy is used to produce “green” hydrogen.”
“Renewable energy can provide an income risk diversifier, but I believe that it pays to spread exposure globally, benefiting from the fixed pricing enjoyed by many renewable operators in places such as North America, Europe, and China,” he finished.