1 dividend superstar that could electrify a passive income portfolio!

This FTSE 100 stock has strong defensive qualities and an excellent dividend history. Here’s why passive income investors should consider buying today.

| More on:
Young mixed-race woman jumping for joy in a park with confetti falling around her

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.

Buying dividend shares is a popular way to generate passive income from the stock market. When vetting dividend stocks to buy, two metrics warrant close scrutiny: the company’s yield and shareholder payout history.

FTSE 100 stalwart National Grid (LSE:NG.) excels in both areas. Not only does the electricity transmission operator offer an index-beating 5.2% yield, but it’s also hiked dividends for an impressive 27 years in a row!

Here’s why I think investors should consider investing in this Dividend Aristocrat today to target a reliable passive income stream.

Private monopoly

One of National Grid’s defining characteristics is its status as a regulated monopoly. Since there’s only one set of transmission or distribution wires in any given area, the company operates without direct competition in its power grid operations across England and Wales.

A monopoly position equips the company with some unique advantages over many firms navigating more competitive landscapes. These include economies of scale, transparent earnings visibility, and consistent cash flows. All great qualities for a dividend stock.

For investors seeking greater portfolio stability amid the rollercoaster of market volatility, owning National Grid shares has a compelling appeal. However, the utility giant’s monopoly status also comes with inherent risks.

Regulated by Ofgem, National Grid is subject to price control mechanisms that restrict its revenue and profit potential. Investment decisions are subject to regulatory oversight too, which means the business isn’t fully in control of its own destiny.

Plus, the possibility of nationalisation, while it looks unlikely today, could be a plausible scenario under a future government.

Indeed, former Labour leader Jeremy Corbyn was mulling such a move only a few years ago. If a buyout were to occur at a depressed valuation, this could potentially destroy significant shareholder value.

Dividend stability

Nonetheless, the passive income that the company provides is a sufficiently attractive reward to compensate for these risks in my view.

National Grid aims to grow the annual dividend per share in line with CPIH inflation. This progressive policy looks especially attractive in light of the significant increase in prices over recent years, which has underscored the gravity of inflationary risks to many investors, myself included.

Granted, despite the firm’s stellar track record, the dividend isn’t guaranteed. Forward cover of just 1.2 times earnings, a capital-intensive business model, and a £46bn debt pile on the balance sheet are all potential causes for concern.

However, National Grid still owns an interest in the UK’s gas transmission system, having already sold off substantial chunks in recent years. Further disposals could help the company meet the costs of updating the electricity network and crucially, protect the dividend from any cuts.

The bottom line

National Grid’s a bona fide defensive stock. It has a strong moat, underpinned by the company’s monopoly position. Plus, I can’t see many credible threats to the demand outlook for electricity transmission and distribution over the coming decades.

There are no certainties in the stock market, but this utility company’s dividend is about as reliable as they come. What’s more, with a forward price-to-earnings (P/E) ratio just above 15, the National Grid share price looks reasonably valued today.

For investors looking to spark up their passive income portfolios, this stock’s well worth considering.

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.

Charlie Carman 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

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »