Why I’d buy National Grid plc over this high-risk dividend share

Royston Wild compares income star National Grid plc (LSE: LON) with another high-yielding stock.

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Huge concern over the long-term future of the UK’s utilities sector has seen market appetite for National Grid (LSE: NG) take a hefty whack over the past several weeks. The business has shed around 10% of its value in the past six weeks alone, mimicking similar weakness in recent times at suppliers Centrica and SSE.

However, I believe this weakness represents a fresh buying opportunity for share pickers to pile back into National Grid. Speculation over a regulatory shake-up in the electricity industry is never likely to go away. But government appetite to revolutionise the sector can be considered lukewarm at best, as evidenced by the Conservatives’ decision to backpedal on their pledge to cap prices should they win June’s general election.

Big yields

No-one would claim that National Grid has what it takes to generate electrifying earnings growth in the coming years.

But therein lies its beauty. While power provision is hardly the most exciting game in town, the dependable nature of electricity demand gives the company the sort of earnings visibility most other London-quoted stocks can only dream of. And this is a particularly critical quality as Britain’s economy looks set to cool.

National Grid is expected to generate earnings growth of 9% in the year to March 2018, and a further 2% rise is forecast for the following year. So unsurprisingly, the City expects dividends to move higher too — a 45.5p per share payout is forecast for this year, a figure that yields a brilliant 4.8%.

And the 46.9p dividend forecast for fiscal 2019 drives the yield to a delicious 4.9%.

Political peril

By contrast, those seeking abundant income flows would do best to avoid Gattaca (LSE: GATC), in my opinion.

Why so? After all, City analysts are expecting the staffing play to keep the dividend locked at 23p per share for the year to July 2017, and to maintain rewards at this level in the current fiscal period. And such a projection creates a whopping 8.2% yield.

Well, the pressures created by the intensifying political and economic pressures in Britain would encourage me to give Gattaca a wide berth despite these whopping forecasts.

The engineering and technology recruitment specialist has seen its stock value descend 9% in Thursday trading after chief executive Brian Wilkinson said: “The UK continues to be our biggest market by some margin and, while we have seen some recovery following the initial uncertainty caused by the outcome of the EU referendum, continuing political uncertainty and its impact on business confidence is unlikely to lead to an increase in customer demand and candidate availability in the near and medium term.”

Gattaca advised that overall net fee income (or NFI) slipped 4% as uncertainties created by Brexit negotiations and June’s general election, allied with tax changes, hampered business confidence. It saw engineering NFI fall 3% from fiscal 2016, while technology NFI slipped by 6%.

City brokers had been predicting earnings rises of 8% last year and 18% this year, but these projections are likely to receive vast downgrades following today’s worrying update. And with conditions set to remain pretty difficult for some time yet, I reckon the company carries too much risk right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any 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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