National Grid (LSE: NG) shares offer one of the most solid dividend yields on the entire FTSE 100, yet I don’t own them. Every time I decide to buy the utility, I get my head turned by one of the ultra-high-yielders on the index.
Wealth manager M&G (LSE: MNG) is a particular culprit. I’m so distracted by its sky-high yield that I’ve bought it three times in the last 12 months. Was this the right thing to do?
It always looks like a good time to buy National Grid, but I never do. As a monopoly provider of an essential national resource (power), it makes a terrific core portfolio holding. Plus it also taps into the US market, giving it more than 7m gas and electricity customers in the Northeastern United States.
Should I have a rethink?
National Grid always seems to trade at fair value and that’s the case today, with a price-to-earnings ratio of 15.74 times. It even has capital growth potential. While its shares are down 2.66% over one year, they’re up 21.61% over five.
Currently, National Grid yields 5.5% a year. That’s a pretty decent rate of income, although I could get similar from a one-year fixed rate bond or corporate bond. The difference is that interest rates will fall at some point, and when they do, so will the yields on cash and gilts. Yet the National Grid yield is expected to rise over time. Markets are forecasting income of 5.8% in 2024 and 5.91% in 2025.
Holding any stock brings risks, even this one. The company has to invest heavily in infrastructure, and the zero carbon drive will add to its costs. Net debt totals £44.6bn and is forecast to hit £48.8bn in 2024. That would put me off a non-utility. I’d still like to buy National Grid today but there’s a problem. I’m still distracted by M&G and especially its 9%+ yield.
That’s really high
Its dizzyingly high dividend, it may trigger alarm bells among some investors, but I think it’s sustainable. The board certainly seems committed to maintaining shareholder payouts, and consensus forecasts are positive. Markets reckon M&G shares will yield 9.95% in 2023 and a thunderous 10.2% in 2024.
That’s not quite double the income from National Grid, but it’s not far off. This is obviously a riskier stock to buy and hold though. Fund managers ultimately live and die by stock market performance, much of which is beyond their control. When markets fall, net assets under management also head south. As customers lose their nerve, withdrawals rise and inflows fall.
We’ve seen a lot of that over the last two years, and we’re not out of the woods yet. But when markets rally – and they will at some point – I’d expect M&G to rally faster. The FTSE 100 is up 1.09% over the last month. M&G is up 5.07%. I don’t expect it to always beat the index by a 5-to-1 ratio, but this suggests it has an edge.
With almost double the dividend and superior growth prospects, I’m more likely to buy M&G for the fourth time than National Grid for the first. Investing is very personal decision. More risk-averse investors may take the opposite view, and I wouldn’t blame them at all. M&G works for me though.
