National Grid (LSE: NG) owns and operates electricity and gas transmission networks across the UK. It also has similar operations in the northeast of the US. This utility stock may sound boring, but it’s a steady money machine, and therefore a perfect way — I think — to start generating passive income.
The company
For the first half of its current financial year, National Grid reported underlying operating profit of £2.1bn. That represents 44% growth year on year, though some of that was due to property sales and a strong US dollar.
Regardless of the source, a large portion of the profit the company generates is paid out to shareholders. That income has grown steadily over the years.
| YEAR (ending 31 March) | Dividend per share (pence) |
| 2019 | 47.3p |
| 2020 | 48.6p |
| 2021 | 49.2p |
| 2022 | 51.0p |
| 2023 (forecast) | 54.6p |
| 2024 (forecast) | 57.5p |
Portfolio repositioning
National Grid has recently been repositioning its portfolio of assets. Last year, it acquired Western Power Distribution, the UK’s largest electricity distribution network operator, for £7.8bn. And it has sold certain gas transmission operations.
These deals mean nearly 70% of the firm’s assets are now focused on electricity. Given that the UK’s demand for electricity is predicted to increase by 70% over the next 25 years, this seems a sensible move.
Passive income
The stock carries a dividend yield of 5.1%. So if I were to purchase 2,000 shares at today’s price of £10 per share, I could be earning £1,000 a year in dividends. Those shares would cost me £20,000.
Now, I might not have £20k to put into shares all at once. But that doesn’t mean I couldn’t start small and work my way up to that amount over time.
I like the phrase, “Rome wasn’t built in a day, but they were laying bricks every hour“.
If I instead invested £416 a month into the stock, it could take me four years to reach £1,000 a year in passive income. That’s assuming a stable average price and that the dividend doesn’t get cut (which is always a risk).
This accumulative method is actually preferable to laying out one lump sum. That’s because it smooths out the natural ups and downs of the stock market. It’s called ‘pound cost averaging’, and has been proven to be far less risky.
It’s also psychologically less stressful too, as I don’t have to worry about mistiming the market. So if National Grid shares drop 15% in a month, then great, I’d get more shares for less money!
Debt load risks
National Grid recently stated that meeting the UK’s renewable energy goal is going to require massive investment into its infrastructure. While building out this infrastructure is necessary, it’s also going to be very costly.
So a potential investor like me should monitor how this impacts the company’s balance sheet. National Grid’s net debt already stands at an eye-watering £28bn, and that’s set to increase.
At some point, servicing this debt could become more of a priority than raising its dividend. Needless to say, any dividend cut might reduce my appetite for owning the shares.
Despite these risks, National Grid remains a core part of my income portfolio. I’m committed to building up my position when the market offers windows of opportunity, with that passive income goal in mind.
