National Grid (LSE: NG) shares are among the most popular on the entire FTSE 100. The electricity transmissions giant offers investors a reliable income stream with relatively little share price volatility. That’s the theory, anyway.
But is National Grid really as solid as people think? And does the income compensate for the lack of share price growth prospects?
There’s next-to-no chance of National Grid going bust. As a monopoly electricity supplier, we simply can’t afford that to happen. The UK would grind to a halt. Yet that doesn’t stop its share price from going up or down, just like any other stock.
So how safe is it?
Over the last five years, National Grid shares are up a steady 20.41%. That may not look earth shattering at first glance, but it has beaten the index as a whole. The FTSE 100 rose just 7.09% during what has been a bumpy period, with Covid and the cost-of-living crisis, and everything else that’s been going on.
Over the last year, National Grid is up just 2.86%, trailing the FTSE 100, which rose 7.66%. The real trouble came in the last six months, when it fell 17.13%. If I’d invested £5,000 in its shares six months ago, my money would be worth just £4,143.50 today, plus any dividends I’d earned. That’s not what I expect to happen with National Grid.
This illustrates an important lesson for investors. No matter how supposedly safe a stock is, there’s always the danger it will fall.
Utilities have been hit hard across the board lately, thanks to rising bond yields. Investors can now get yields of 4.8% from 10-year UK gilts or US Treasuries, making them think twice about taking a punt on equities.
Shares in FTSE 100 listed United Utilities Group, for example, have fallen 13.18% over the last six months. FTSE 250 listed water utility Pennon Group has fared even worse. Its stock is down 29.72% over the same period.
Returning to National Grid, I still reckon it gives bonds a good run for their money with a current yield of 5.86%. Especially since analysts expect that to hit 6.18% in 2024 and 6.34% in 2025.
I like other dividend stocks more
Its shares normally trade around the fair value mark of 15 times earnings. They’re only marginally cheaper today at 14.86 times. I don’t hold National Grid shares in my SIPP or ISA portfolios, but I’ve been wondering whether to buy them for some time and the recent dip does look like an opportunity. So what’s holding me back?
While I admire the stock, and would happily hold it, I think the FTSE 100 has more exciting targets for my money today. Many dividend-paying blue-chips are now so cheap, given the general gloom, that they can hardly fall much further (although never say never). They also offer both higher yields and superior share price growth potential to National Grid.
Lloyds Banking Group is just one example. It now trades at just 5.6 times earnings, and is forecast to yield 7.23% in 2024. I hold the stock and would rather buy more of it than National Grid. Diversification is great, but one can take these things too far.