National Grid (LSE: NG) shares are a terrific source of second income as they pay some of the most reliable and rewarding dividends on the entire FTSE 100. As a regulated utility, its earnings stream is pretty solid. As a monopoly, competition is thin on the ground.
Its main job is distributing electricity to UK homes and businesses, but it adds a bit of sizzle by delivering energy to another 20m customers in New York and Massachusetts.
Few investors buy it for share price growth, as it’s the dividend that matters. Yet over the years, the stock has done pretty well. The share price fell 0.82% over 12 months, but it’s up 29.1% over five years. That easily beats the FTSE 100 as a whole, which grew just 9.59% over the same period.
It’s easy to see why investors love National Grid. This may not be the most exciting stock on the Footsie. However, it’s a great initial building block for a portfolio of direct equities.
Dividends and growth
Today, the stock generates income of 5.4% a year. That beats the FTSE 100 as a whole, which currently yields an average of 3.8%. It’s forecast to yield 5.68% in 2024 and 5.82% in 2025. That would give me a high and rising second income, assuming those forecasts come good (there are never any guarantees).
National Grid’s payout is more secure than most, even if it’s covered just 1.2 times by earnings. It can get away with relatively thin cover because of the regulated nature of its earnings.
That also helps it sustain relatively high levels of net debt. This is forecast to climb to £44.8bn in 2024 and £48.9bn in 2025. That surpasses the stock’s market cap of £38.2bn and would terrify me with any other business. National Grid has to invest a small fortune in maintaining critical energy infrastructure, and funding the switch to cleaner energy.
Its revenues are far from flat, even though they’re regulated. In 2021, they totalled £13.7bn. That climbed to £18.4bn in 2022 and £21.7bn in 2023.
High and rising yield
FY24’s H1 operating profits fell. However, that was anticipated, and was mostly down to non-recurring items like property land sales in the year before. The board has also had to increase its regulatory capital investment by 10% to a record £3.9bn.
National Grid’s annual dividend per share has been tipped to climb from 55.44p in 2023 and to 57.5p in 2024. Using the 2024 figure, I’d need to buy 1,739 shares to generate income of £1,000 in the first year of holding the stock.
At today’s price of 1,025p, that would cost me £17,825. Sadly, I can’t afford to invest that much in a single stock. It would swallow most of this year’s Stocks and Shares ISA allowance. I’d happily invest £5k at today’s valuation of 16.1 times earnings. It’s rarely any cheaper.
If I had to go all-in on just one single FTSE 100 company for life I’d probably choose this one. But I’m not in that position. I’m already own a dozen UK blue-chips, so now I want to bag a few super-high-yielders instead, ideally with even more growth potential than National Grid offers. I’m betting the market will rally at some point this year, and I want my portfolio to be leading the charge.
