When it comes to the old dilemma of choosing between share price growth and dividends, some companies just shout dividends.
And with the bulk of its earnings being converted to cash in investors’ pockets via steady yields of around 5-6% over the past few years, National Grid (LSE: NG) (NYSE: NGG.US) is clearly one of them.
Income portfolio
I’ve often said that when you’re looking to build a long-term portfolio to provide you with steady cash a decade or more in the future, you should seek a mix of high current yields and strong dividend growth — and those with high yields today should be growing them at least in line with inflation.
Here’s what National Grid’s track record looks like:
| Year (to Mar) |
Dividend | Yield | Cover | Rise |
|---|---|---|---|---|
| 2011 | 36.37p | 6.1% | 1.40x | -5.5% |
| 2012 | 39.28p | 6.2% | 1.27x | +8.0% |
| 2013 | 40.85p | 5.3% | 1.41x | +4.0% |
| 2014 | 42.03p | 5.1% | 1.58x | +2.9% |
| 2015* |
43.38p | 4.8% | 1.27x | +3.2% |
| 2016* |
44.67p | 5.0% | 1.30x | +3.0% |
* forecast
Terrific yields
Those are very high yields, and they’re keeping ahead of inflation, which means shareholders are getting real increases in their income each year. The yield is set to drop to 4.8% this year only because the share price has risen by 20% over the past 12 months, to 909p.
In fact, over five years the National Grid share price has climbed more than 70%, easily beating the FTSE 100 average at just under 40% — and that’s a nice bonus.
And even though National Grid shares have only recently set a new 52-week record, they’re still only on a forward P/E of 16.3 for the year to March 2015, dropping to 15.6 based on 2016 forecasts. For such a quality a company with a very low-risk future, that doesn’t seem stretching at all.
Dividends at risk?
The energy sector is entering a bit of a troublesome period, with political and regulatory pressure making it pretty much impossible to raise prices in the near term. So how is that likely to impact dividend growth?
Well, when the company released its 2014 results in May, chief executive Steve Holliday said “…we continue to build a stronger business from which to deliver healthy returns, and good organic growth to support our commitment to sustainable dividend growth“.
Ignore at your peril
If you’re aiming to build a solid income portfolio, I reckon you’d be mad to overlook National Grid as a potential candidate — and you’re likely to get comfortable share price performance over the long term, too.
