How much passive income can I make from 646 National Grid shares?

National Grid shares have a high yield that can generate sizeable passive income over time, especially if the dividends are reinvested in the stock.

| More on:

Image source: National Grid plc

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.

National Grid (LSE: NG) shares saw a turbulent few weeks ahead of the firm’s rights issue that ended on 12 June.

Having secured £6.39bn for investment, prospects for the owner-operator of England and Wales’ electricity transmission system look positive to me.

By financing this new investment through equity, it has not added to its debt-to-EBITDA ratio of around 7.6. However, this still compares very unfavourably to the ratio of 2 at the top end of what is considered healthy, so remains a risk.

That said, it has interest cover of around 2.8 times, enabling it to comfortably service these debt obligations for the time being. Nonetheless, I would like to see this start to trend lower over the next three years.

Rising earnings would help it to do this, of course. In its H1 2024 results, it maintained its 2020/21 five-year compound annual growth rate (CAGR) of 8%-10% to 2025/26. It also reiterated its earnings per share CAGR target of 6%-8% to that point.

How much passive income can it generate?

For the full-year 2023/24, it paid a dividend of 58.52p a share. On the current stock price of £9.28, this gives a yield of 6.3%, better than the 3.6% FTSE 100 average.

So, £6,000 (less than £20 saved daily for a year) would buy me 646 shares in the company. In the first year, these would make me £378 in dividend payments.

If I removed this money from my investment account, I would make the same amount again the following year. That is provided that the yield stayed the same, although it could go down as well as up, depending on changes in the share price and dividend payouts.

Over 10 years of doing this, I would have an extra £3,780 to add to my initial £6,000 investment. Not bad. But I could do a lot better if I bought more of the shares with the dividends they paid me.

Doing this (‘dividend compounding’) on the same yield would make me an extra £5,247 instead of £3,780.

After 30 years, my shareholding would be worth £39,520 in total. This would pay me £2,490 a year in dividends, or £208 every month!

Making even more from £0 in the bank

It is a common misconception that investing in shares requires a lot of money to start with. This is not true, and significant returns can be made despite having nothing in the bank at the beginning.

Just £5 a day, for example, can create a major stream of income from dividends over time.

After 10 years of putting this amount into National Grid shares with an average 6.3% yield, the investment would be worth £25,117! This would pay £1,582 a year in dividends, or £132 each month.

After 30 years of doing the same, with the same average yield, the investment would be valued at £160,459. This would generate £10,109 a year in dividend payments, or £842 every month!

I have several shares with strong business outlooks that pay me high dividends, and I am happy with those. However, if I did not have them I would buy National Grid for its good yield and solid 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.

More on Investing Articles

Investing Articles

Is this one of the FTSE 100’s best-value growth shares?

Looking for great-value recovery shares to buy today? Based on City forecasts, this could be one of the best that…

Read more »

Investing Articles

Will the Tesco share price hit a 10-year high in 2024?

Up from 200p less than two years ago, the Tesco share price has enjoyed impressive growth lately. Now I'm considering…

Read more »

Electric cars charging in station
Investing Articles

Where will Tesla stock be in 5 years? Here’s what the experts say

The analysts' outlook for Tesla stock in the next few years seems to be all over the place, as the…

Read more »

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

Nearing its 12-year low, this FTSE growth stock could be the bargain of the year!

Harvey Jones has happy memories of owning this FTSE 100 growth stock. Now he's wondering whether to take a trip…

Read more »

Investing Articles

BT share price: a bargain or one to avoid?

This Fool has been keeping tabs on the BT share price. Despite looking cheap, he's steering clear of the stock…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

3 reasons why I predict UK shares will soar over the next 12 months!

Our writer believes there are plenty of reasons why UK shares will do well over the next year or so.…

Read more »

Investing Articles

Are these the best stocks to buy after the UK election?

With Labour now leading the UK, change is on the horizon. I'm considering the best stocks to buy based on…

Read more »

Investing Articles

1,000 shares in this FTSE 100 stalwart would give me £525 of dividends!

The FTSE 100 is packed full of stocks offering sizeable dividend yields, but I feel this one is the pick…

Read more »