How much passive income would I make from 945 National Grid shares?

National Grid shares pay a healthy dividend that, over time, can produce a sizeable passive income if the dividends are reinvested back into the stock.

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Image source: National Grid plc

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National Grid (LSE: NG) shares are currently trading at £10.58. So, £10,000 would buy me 945 of them.

In 2023, the owner-operator of the electricity transmission system in England and Wales paid a dividend of 55.44p a share. This gives a yield of 5.2%.

There is every chance this will go up this year, in my view. The company increased the interim dividend for 2024 by 9%.

If the full-year dividend increased by the same percentage, it would be 60.43p. Based on the present share price, this would give a dividend yield of 5.7%.

How much passive income would I make?

Passive income is money made through minimal daily effort. And as legendary investor Warren Buffett put it: “If you don’t find a way to make money while you sleep, you will work until you die.”

There are two ways of handling dividends paid every year.

First, they can be withdrawn from the investment account in which they are held and spent. On this basis, £10,000-worth of shares in National Grid paying 5.2%, would make £520 a year.

Over 10 years, provided the yield averaged 5.2%, this would add £5,200 to the £10,000 initial investment.

However, the second way to handle these dividends involves reinvesting them back into the stock. This is ‘dividend compounding’, and it produces much bigger returns than the first option.

Doing this, £10,000 invested at a 5.2% average yield would make an additional £6,801 rather than £5,200 after 10 years.

After 30 years based on the same average yield, the total investment would be worth £47,428. This would pay £2,398 a year, or £200 a month in passive income.

Bigger returns starting from £0 in the bank

Would-be investors can achieve the same or more from having £0 in the bank.

Saving and investing just £5 a day in 5.2%-yielding National Grid shares would produce £23,645 after 10 years. This is also provided that the dividends are reinvested back into the stock.

After 30 years on the same basis, the total would be £130,120. This would pay £6,537 a year, or £545 every month in dividend payments!

Is a high yield sustainable?

The key stock risk is a sizeable debt accruing from regulator-directed investment in the England and Wales power grids. I would like to see this start to trend lower over the next three years.

However, even when the cost-of-living crisis was at its height in 2022/23, National Grid still made £1.8bn in underlying profit.

It also continued to pay a good dividend, and it did so during the peak years of Covid as well.

Working back from 2023, the dividends yielded 5.3%, 4.3%, 5.7%, 5.1%, and 5.6%, respectively. This compares to the average FTSE 100 yield from 2019-2023 of around 3.7%.

In its H1 2024 results released on 9 November 2023, it maintained its five-year financial targets for 2020/21 to 2025/26.

These include an assets’ compound annual growth rate (CAGR) of 8%-10%, and an earnings per share (EPS) CAGR of 6%-8%.

I will not be buying National Grid right now as I have other high-dividend-paying stocks in my portfolio.

If I did not have them, I would buy the stock now for its consistently healthy dividend and its growth prospects.

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.

Simon Watkins 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.

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