There’s a strong argument that National Grid (LSE:NG.) shares could be a great dividend power play. The electricity transmission operator has an impressive record of delivering passive income to shareholders stretching back decades, even during periods of macroeconomic crisis.
So, how much would I need to invest in the FTSE 100 company for a second income of £1,200 a year? And what’s the outlook for future share price growth?
Here’s my take.
Dividend income
National Grid pays dividends twice a year. In the latest financial year, the company grew its dividend by 8.8% to 55.44p per share. Currently, the stock trades for £9.89 and offers a juicy 5.61% dividend yield.
To target £100 in monthly passive income, I’d need to buy 2,163 National Grid shares for a total of £21,392.07.
That’s a lot to invest in one company. As I don’t have that amount of spare cash, I prefer to spread my investments across multiple stocks to manage my risk exposure via diversification. After all, a fabulous dividend history doesn’t mean the stock’s immune to possible future dividend cuts.
Nonetheless, it’s a useful indication of how many shares investors need to secure the equivalent of a three-figure monthly income, especially for those managing larger portfolios.
Monopoly power
So, what makes the National Grid dividend special?
The company occupies a natural monopoly position. Energy companies can’t connect to the UK’s grid until the business enables this via transmission cables. Accordingly, competition risks facing the firm are lower than many of its FTSE 100 counterparts.
With its focus firmly on future opportunities, National Grid’s undertaken considerable work to pivot its business model away from gas towards electricity. Currently, its assets are weighted 70% on electricity, with only 30% now concentrated on gas. What’s more, the company expects it’ll deliver a record £8bn in capital investment this year as it decarbonises its energy networks.
Encouragingly, the dividend’s supported by strong numbers. Full-year revenue grew 17% to £21.7bn and underlying operating profit rose 10% to £4.6bn on an FX-neutral basis. The group expects it’ll deliver annual earnings growth between 6% and 8% from now until 2026.
Risks
Although monopoly power has advantages, it means National Grid operates in a stricter regulatory environment. Ofgem has criticised delays in the group’s efforts to connect solar farms and wind turbines to the electricity grid.
The regulator’s mulling reforms that could include stripping the company of its planning powers with regard to network upgrades. This serves as a reminder to investors that National Grid isn’t completely in charge of its own destiny.
In addition, although the group reduced its net debt by 4% to £41bn in the last financial year, that figure still looks too high to me. As interest rates continue to march higher, the cost of servicing these liabilities could weigh on profitability.
Should investors buy?
If investors are considering National Grid shares for their portfolios, dividends are the main appeal in my view.
Regulatory risks and concerns about the company’s leverage cloud the outlook for further share price growth, but management seems keen to preserve the group’s reputation as a passive income stalwart.
Regarding my own portfolio, if I had spare cash, I’d take a modest stake today.
