The London Stock Exchange is filled with dividend stocks paying out handsome yields. As such, income investors are often spoilt for choice when looking to bolster their passive income streams. That’s especially true today, with so many UK shares still trading at a discount, thanks to the 2022 market correction.
A common desire among income investors is the ability to simply invest and forget. Mature businesses with reliable cash flows make for a more hands-off approach, enabling individuals to focus on other things. That’s one of the reasons why Dividend Aristocrats are so popular. And at a yield of 5.5%, National Grid (LSE:NG.) shares are looking quite enticing.
A no-brainer stock to buy?
As the chief owner and operator of the UK’s energy infrastructure, demand for National Grid’s services isn’t exactly going anywhere. In fact, with more households opting for electric vehicles, the energy flow on its network is growing rapidly each year – a trend expected to continue for decades to come.
Its monopolistic position, paired with highly cash-generative operations, is how the firm has hiked dividends for more than 25 years in a row. That certainly sounds like a fantastic trait to see within a potential income investment. Yet, looking at the latest half-year results, pre-tax profits have actually tumbled by 18% year-on-year. So what’s going on?
A large part of this lacklustre display can be explained away by the occurrence of a one-time income event last year. However, the rest seems to be a result of regulatory intervention. Of course, that’s nothing new, and something management has been operating with for decades.
Looking into the future, the recent passing of the Energy Act 2023 in parliament provides a welcome catalyst to National Grid’s business. As the UK moves towards its goal of net zero, the company should have little trouble securing new opportunities to steadily bolster its cash flow. And that likely means the group’s multi-decade streak of raising shareholder payouts is here to stay.
Analysing the risk
Like every dividend stock, National Grid still has an air of uncertainty surrounding its payouts. Building and maintaining electrical infrastructure isn’t cheap. And the group’s now sitting on a fairly impressive debt pile of around £43bn!
That’s more than the entire market capitalisation of this business and presents a serious threat should cash flows become interrupted. The likelihood of that happening seems small, considering the need for electricity. But a sudden severe fault in the network that’s not quickly rectified isn’t impossible. And with interest rates now significantly higher than in the past decade, the impact of such adverse events will probably be significantly amplified.
The bottom line
Slow and steady often wins the race for dividend stocks. And that’s certainly an appropriate description of National Grid, who’s been consistently rewarding investors for years. At a yield of 5.5%, the potential reward merits the risk, in my mind. But at the same time, there are other similar-yielding stocks available to buy that don’t have such a massive debt pile to contend with.
So while I’m cautiously optimistic about the long-term outlook of this enterprise, it’s not one I’m personally tempted to add to my portfolio.
