Why National Grid plc is a dividend bargain I’d buy and hold for 25 years

National Grid plc (LON: NG) could deliver high income returns in the long run.

| 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.

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.

While the FTSE 100 may have risen to a new record high this year, not all shares have performed so well. In fact, National Grid (LSE: NG) has fallen by 15% since the start of the year as investors have shunned defensive utility shares in favour of more cyclical growth opportunities. However, with inflation now standing at 3% and forecast to rise yet further, the company could prove to be a worthwhile buy for the long term.

Defensive income appeal

While the current Bull Run being experienced by the main index could continue over the medium term, inevitably a bear market will come into being. This could mean that it is prudent for investors to hold a mix of defensive shares and cyclical stocks, since the performance of the stock market can change quickly. With National Grid having a defensive business model which lacks high correlation to the performance of the wider economy, it could hold substantial appeal in the long run.

Furthermore, National Grid also has significant income potential. As mentioned, its share price has fallen by 15% this year and this means it now has a dividend yield of 5.1% from a shareholder payout which is covered 1.3 times by profit. This suggests that it could offer a real yield even if inflation continues to move higher. Furthermore, there is scope for dividend growth which is in line with inflation, since there appears to be substantial headroom when the company makes its dividend payments.

Clearly, the utility sector faces a degree of political risk. Domestic energy suppliers could see action regarding price caps. Since National Grid avoids this potential problem due to its focus being on electricity transmission rather than supply, it may offer relatively high share price growth over the medium term.

A stock to avoid?

While National Grid appears to offer a sound mix of defensive and income prospects, gaming retailer Game Digital (LSE: GMD) could be a stock to avoid. It reported full-year results on Wednesday which showed it continues to face an uncertain outlook even though there has been a pickup in demand following the release of various games consoles.

Although trading in the first 15 weeks of the current year has been ahead of group plans, a difficult consumer outlook means that its financial performance could suffer over the medium term. Falling real disposable incomes could cause non-essential items such as games consoles to record lower sales in future, which would hurt the company’s financial performance.

While Game Digital seems to have a sound strategy to reduce costs and maintain market-leading positions in its key markets, it looks set to face trading headwinds. It is forecast to remain a lossmaking entity in the current financial year and this could cause investor sentiment to decline in the coming months. With many retailers offering low valuations and growing profitability over the same time period, there may be superior risk/reward opportunities on offer at the present time.

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.

Peter Stephens owns shares in National Grid. 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

Mixed-race female couple enjoying themselves on a walk
Investing Articles

A once-in-a-decade chance to get rich buying growth stocks?

We haven't seen a good spell for growth stocks for quite a few years now. But I reckon the signs…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

The FTSE 100 is full of bargains! Here’s 1 stock I’m eyeing up

A weak economic outlook has hurt the FTSE 100. This Fool explains why she likes the look of this consumer…

Read more »

Investing Articles

2 no-brainer beginner FTSE 100 stocks to buy for my portfolio

Getting started with investing can be daunting. Here are two stocks for beginners to consider buying to build their first…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 recession-resistant UK shares investors should consider buying

Our writer details two UK shares she feels could withstand some of the ill-effects of the current malaise to provide…

Read more »

Tanker coming in to dock in calm waters and a clear sunset
Investing Articles

Glencore share price drops on results. Time to buy?

The Glencore share price wobbled a bit after a weak set of 2023 results. Here's why I have the stock…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Big trouble in China sinks HSBC shares. Should I invest after record FY results?

HSBC shares have slumped following a disappointing end to 2023 for the FTSE stock. Royston Wild explains why this may…

Read more »

View of Tower Bridge in Autumn
Investing Articles

3 dirt cheap FTSE 100 shares to snap up today?

The FTSE 100 is rallying, but many shares still look super cheap on fundamentals. Is our writer buying these three…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

FTSE 100 earnings: what can we expect from Rolls-Royce in 2024?

The Rolls-Royce share price tripled in 2023. Roland Head wonders whether this FTSE 100 stock could continue that impressive trajectory…

Read more »