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).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

More on Investing Articles

Investing Articles

Here’s how I’d aim for a ton of passive income from £20k in an ISA

To get the best passive income from an ISA, I think we need to balance risk with the potential rewards.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

2 FTSE 100 stocks I’d buy as the blue-chip index hits record highs

This Fool takes a look at a pair of quality FTSE 100 stocks that appear well-positioned for future gains, despite…

Read more »

Satellite on planet background
Small-Cap Shares

Here’s why AIM stock Filtronic is up 44% today

The share price of AIM stock Filtronic has surged on the back of some big news in relation to its…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

At a record high, there can still be bargain FTSE 100 shares to buy!

The FTSE 100 closed at a new all-time high this week. Our writer explains why there might still be bargain…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After profits plunge 28%, should investors consider buying Lloyds shares?

Lloyds has seen its shares wobble following the release of its latest results. But is this a chance for investors…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

Something’s changed in a good way for Reckitt in Q1, and the share price may be about to take off

With the Reckitt share price near 4,475p, is this a no-brainer stock? This long-time Fool takes a closer look at…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This new boost in assets might just get the abrdn share price moving again

The abrdn share price has lost half its value in the past five years. But with investor confidence returning, are…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

As revenues rise 8%, is the Croda International share price set to bounce back?

The latest update from Croda International indicates that sales are starting to recover from the end of 2023, so is…

Read more »