Which is the best second income stock? National Grid vs Nordic American Tankers

Millions of Britons invest for a second income, but sometimes it’s hard to find the right stocks to make it happen. Dr James Fox compares two big payers.

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Wouldn’t it be great to have a tax-free second income? Well, it’s certainly possible and easier than many of us may think. Investing £1,000 in Nordic American Tankers (NYSE:NAT) today would yield £113.90 in the form of dividends. That’s because it has a whopping 11.39% dividend yield.

So today, I’m comparing it to another stock, National Grid (LSE:NG.), which operates in a similar energy-focused sector, and has recently been in the limelight.

Nordic American

Nordic American’s recent earnings were something of a letdown. The small-cap oil tanker firm operates 20 Suezmax vessels — the largest tankers possible to fit through the Suez Canal — and these vessels are supposedly in demand given the disruption taking place around the Red Sea.

However, Q1 earnings showed that leasing rates were down from Q4 of 2023, albeit way above long-term averages.

So what now? Well, Nordic American’s still in a strong position to benefit from long-term trends within the sector.

Analysts had been warning for years that there were too few new tankers coming on-line. Just two supertankers will enter the global fleet in 2024. It’s reportedly the oldest global fleet in living memory.

And new capacity can’t come online immediately. These ships can take years to build. As a result, companies like Nordic American, with its streamlined and relatively young fleet of Suezmax tankers, are in prime position to benefit over the long run.

The dividend yield, as noted, currently sits at 11.39%. That’s huge, but potentially unsustainable unless earnings pick up in Q2 and Q3. As it stands, almost all of Nordic’s earnings for 2024 will be paid out in the form of dividends.

However, in 2025, the dividend coverage ratio will improve to around 1.5, based on projected earnings.

It’s no longer the slam-dunk buy that I and several analysts thought it was a few months ago, but it remains a strong dividend stock.

Even if the dividend’s cut, it’ll likely remain far above average.

National Grid

Shares in the National Grid slumped in May after the energy infrastructure giant announced a £7bn equity raise through a rights issue.

The raise will help National Grid fund future investments — the FTSE 100 company plans to spend £60bn over the next five years, double the previous half-decade — but it will increase the share count significantly.

In turn, this means earnings and dividends will be diluted. At first glance, investors might be drawn in by the 6.7% dividend yield. But, sadly, that’s not going to be the case after the shares are diluted.

Moreover, the company plans to reduce its dividend from 53.1p per to 45.3p per share as of next year to accommodate its investment plans.

The dividend coverage ratio hasn’t traditionally been the strongest. It came in at 1.15 in 2023 and 1.41 in 2024.

My calculations suggest the dividend yield will remain above the index average, but it’s nowhere near as strong as it appears at first glance.

The bottom line

Nordic American and National Grid are both above-average dividend payers but have unfavourable dividend coverage ratios in the near term.

Despite the recent disappointment, I’m sticking with Nordic American and I’m keeping away from National Grid shares for now.

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.

James Fox has position in Nordic American Tankers Limited. 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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