Is this dividend stock a no-brainer for boosting passive income?

This dividend stock’s raised shareholder payouts for decades and offers a solid 5.5% yield today. Could it be a good portfolio addition in 2024?

| More on:
Diverse group of friends cheering sport at bar together

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Could the FTSE 100 be set to soar in 2024?

The FTSE 100 keeps threatening to go off on a growth spree. And weak sentiment keeps holding it back. But…

Read more »

Investing Articles

Is this FTSE 100 stalwart the perfect buy for my Stocks and Shares ISA?

As Shell considers leaving London for a New York listing. Stephen Wright wonders whether there’s an undervalued opportunity for his…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

3 things I’d do now to start buying shares

Christopher Ruane explains three steps he'd take to start buying shares for the very first time, if he'd never invested…

Read more »

Investing Articles

Investing £300 a month in FTSE shares could bag me £1,046 monthly passive income

Sumayya Mansoor explains how she’s looking to create an additional income stream through dividend-paying FTSE stocks to build wealth.

Read more »

Investing Articles

£10K to invest? Here’s how I’d turn that into £4,404 annual passive income

This Fool explains how using a £10K lump sum can turn into a passive income stream worth thousands for her…

Read more »

Investing Articles

1 magnificent FTSE 100 stock investors should consider buying

This Fool explains why this FTSE 100 stock is one for investors to seriously consider with its amazing brand power…

Read more »

Rainbow foil balloon of the number two on pink background
Investing For Beginners

2 under-the-radar FTSE 100 stocks under £2

Jon Smith identifies two FTSE 100 stocks that he believes are getting a lack of attention from some investors but…

Read more »

Investing Articles

£8,000 in savings? I’d use it as a start to aim for £30k a year in passive income

Here's how regular investing in the UK stock market, over the long term, could help us build up some nice…

Read more »