Why the National Grid share price could crush the FTSE 100

The outlook for National Grid plc (LON: NG) may be stronger than FTSE 100 (INDEXFTSE: UKX) investors currently realise.

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The performance of the FTSE 100 has been hugely positive in recent years. It has enjoyed a bull market that has sent it to record levels, with investor sentiment being very upbeat.

However, the reality is that no bull market lasts forever. Therefore, it may be prudent for investors to seek defensive, dividend-paying shares such as National Grid (LSE: NG). It may be able to outperform the wider index over the long run, while another dividend stock that released a trading update on Wednesday may also have investment appeal.

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Total returns

Although National Grid may not have a track record of generating high earnings growth, the company’s total returns could be impressive in the long run. The stock has a dividend yield of around 5.3%, which makes it one of the higher-yielding shares in the FTSE 100. Furthermore, when it is considered that most of the index’s gains in the last 10 years have come from dividends, buying income stocks begins to have additional appeal.

For example, over the last decade the FTSE 100 has generated capital growth of 2.7% per annum. That’s despite the index enjoying record highs in recent years, and the fact that 10 years ago it was part-way through a bear market. As a result, many investors may have expected stronger capital growth to have been delivered.

Defensive prospects

Although regulatory risk has increased for National Grid in recent years, the company continues to offer a relatively robust investment outlook. Its financial performance is less closely correlated to the wider economy than that of many of its index peers. Should global growth prospects be damaged by the possibility of a trade war or geopolitical risks, for example, the stock could gain in popularity among investors.

Therefore, with its dividends being covered 1.2 times by profit and forecast to grow by 2.7% per year over the next two years, outperformance of the FTSE 100 could be ahead.

Income opportunity

Another possible income opportunity for investors is technology recruitment and outsourcing company Harvey Nash (LSE: HVN). It released a positive trading update on Wednesday which showed that it has delivered gross profit growth of 7% in the first part of the current financial year.

Growth was especially strong in the UK, where gross profit increased by 20%. This was despite uncertainty regarding Brexit negotiations, with a robust growth in the volume of contractors helping to catalyse the company’s performance. And with a survey conducted by the business showing that the proportion of companies reporting budget increases is at its highest level since 2005, its future prospects seem to be bright.

With Harvey Nash currently yielding 4.4% from a dividend that is covered three times by profit, its income potential seems to be attractive. Since the stock trades on a price-to-earnings growth (PEG) ratio of just 0.5, its total return prospects seem to be highly appealing at the present time.

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Peter Stephens owns shares of 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.

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