National Grid (LSE: NG.) rocked the investment world at the end of May, and the share price tanked.
Normally a plodder, with not much happening in between dividend payments, the energy grid firm has just shaken off some cobwebs.
It’s all about a new stock issue, to raise cash for future growth. It means dilution, with a rebasement of the dividend. And the seven shares for every 24 that shareholders currently own were priced at just 645p.
Price loser
The Grid’s shares are down 15% from their close price the day before the shock news. So what does all this mean for passive income investors? Does it knock the stock off its pedestal as one to buy for dividends and then just forget about for decades?
No, I think it’s done just the opposite. I reckon the market has overreacted, as usual. And National Grid looks like an even better long-term dividend stock to me now.
What might it earn, in terms of passive income?
Dividend forecasts
With the share price down, the dividend yield still looks good. Analysts have a dip marked in for 2025, but they still expect a 5.3% yield. And they see it growing to 5.7% the next year.
If the new cash injection helps the firm to grow faster in response to changing renewable energy needs, I think we could see better long-term rises in the annual cash.
There has to be a good chance of a rising share price too, especially once the dust has settled and things are clearer.
But even if it only gains 2% a year, that could still be a total return of 7.3% a year based on that 2025 forecast — ignoring any later rises.
Passive income pot
I’d never put all my money into one stock. No, that would be madness, even for one where I see long-term safety like National Grid.
So if I buy some, it will be as part of a diversified Stocks and Shares ISA. And I see lots of other dividend shares to add too.
But, for fun, what might someone who could put £10,000 into National Grid shares every year achieve? If they buy new shares with the dividends, they could reach a pot of £440,000 in 20 years.
Or more than a million in 30 years. The final decade would be worth more than the first two! That’s how the magic of compounding works.
Danger too
The new direction that National Grid plans to follow will likely bring more risk. And I can see the share price being a bit wobbly for a while.
I really can see the shares trading on a low price-to-earnings (P/E) valuation for a few years now. A change like this can do that to a stock.
Still, I do think National Grid might be the best long-term passive income stock I’ve never bought. I really should do something about that.
