One ‘secret’ dividend growth stock I’d buy with National Grid plc

Why this FTSE 250 turnaround stock could be the perfect portfolio partner to National Grid plc (LON:NG).

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Shareholders of National Grid (LSE: NG) receive a reassuringly regular dividend that keeps pace with inflation. But even the firm’s biggest fans probably don’t expect their dividend payout to rocket ahead over the next few years.

In my experience, solid defensive stocks like National Grid provide a solid foundation for a long-term portfolio. But investment performance can often be improved by adding a mix of smaller companies with the ability to grow profits — and dividends — much faster than inflation.

I’ve identified one FTSE 250 stock which could be the perfect partner to the UK electricity giant.

Business as usual?

National Grid’s recent half-year results were a good example of the kind of ‘business as usual’ performance investors have come to expect from the group.

Adjusted operating profit rose by 4% to £1.4bn, while the interim dividend rose by 2.1% to 15.49p, in line with the group’s payout policy. Shareholders also received a bonus thanks to an 84p per share special dividend. This was funded using £3.2bn of the cash received from the sale of the group’s Gas Distribution division.

Looking ahead, the picture is rather mixed. The group’s shares have fallen by around 20% from May’s 52-week high of 1,097p. This has probably been driven by downgraded earnings forecasts for the current year. City analysts who follow the stock have cut their forecasts from an average of 70.3p per share in May, to just 59.9p per share today.

That’s a little disappointing, but I don’t think it takes away from the long-term income appeal of this group. Indeed, this fall means that the shares now offer a forecast yield of 5.2%. This looks supportable to me and could be a savvy long-term income buy.

I need some growth

However, I believe the performance of most portfolios can be improved by owning dividend stocks with growth potential. One possible choice is FTSE 250 engineering group Senior (LSE: SNR).

This company’s main focus is on the defence and aerospace sectors. It’s had a tough few years but now appears to be in the early stages of a successful turnaround.

On Monday the group reported a significant new contract to manufacture parts for Boeing and advised investors that full-year adjusted pre-tax profit is now expected to be “slightly ahead of previous expectations”.

Still time to buy?

Senior shares have already risen by 40% this year. This rise has priced-in improved profits and left the stock trading on a 2017 forecast P/E of 20. So is it too late to buy?

I don’t think so. The group’s turnaround is still at a relatively early stage. With good management, I believe this firm has the potential to deliver strong earnings growth over the next few years. Analysts expect the group’s earnings per share to increase by 16% in 2018, for example.

These shares also have an impressive track record of income growth. The payout has not been cut since 2001 and has risen by an average of 11% per year since 2011.

Although the stock’s current yield is a relatively modest 2.5%, investing today could open the door to a market-beating mix of income and growth over the coming years. I believe Senior is definitely worth considering at current levels.

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.

Roland Head 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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