I don’t currently own National Grid (LSE:NG.) shares in my Stocks and Shares ISA or Self-Invested Personal Pension (SIPP). But I’m looking to build a sizeable stake when I next have cash to invest.
I already own an array of FTSE 100 shares including Ashtead Group, Legal & General, Aviva and Rio Tinto. National Grid — which focuses on the transmission and distribution of electricity in the UK — is the next blue-chip share on my shopping list.
Here are three reasons why I think it’s a top stock to consider today.
1. Peace of mind
Owning National Grid shares has been an eventful experience more recently. And not in a good way.
Its share price sank following a badly-received strategy update in May. In it, the company announced plans to reduce dividends per share following a £6.8bn rights issue.
It remains risky but it’s important to remember that National Grid has historically provided a stable return over time. And as a long-term investor, this is what still attracts me to the company today.
Keeping Britain’s power grid working is a critical activity that’s unaffected by broader economic conditions. As a result, revenues and cash flows at the firm continue to stream in year after year.
What’s more, under Ofgem regulations, National Grid’s allowed to make a reasonable return on its investments. It also operates as a monopoly, meaning that sales are not under threat from competing firms.
Regulatory changes later down the line could damage revenues. But at the moment it still remains one of the most stable and stress-free shares out there.
2. Dividend potential
Such stability also ensures the company has the means and the confidence to pay a solid dividend each and every year.
I mentioned earlier that National Grid’s dividends per share will fall in this financial year (to March 2025). However, the yield here still stands at an impressive 4.9%, well above the 3.5% average for FTSE shares.
The business plans to increase dividends immediately after this year’s rebasement too, pushing the yield above 5% by fiscal 2027. This continues its policy of raising cash rewards in line with CPIH (consumer prices index including owner occupiers’ housing costs).
As things stand, it looks set to remain an excellent dividend payer for the foreseeable future.
3. Green investment
Demand for clean energy’s rocketing as the transition from fossil fuels intensifies. And National Grid’s ramping up investment to capitalise on this opportunity.
In May’s strategy update, it announced plans to spend £60bn between now and 2029 to upgrade its energy infrastructure. This is an enormous amount, more than double expenditure of 2019-2024. And it prompted the firm to launch that near-£7bn rights issue.
But the long-term benefits for shareholders could be significant. Hargreaves Lansdown analysts note that “the sheer scale of the investment plans brings with it increased execution risk, but should management pull it off, investors will likely be rewarded for their patience“.
Like management, I feel that the potential benefits of National Grid’s green drive outweigh the risks. The strategy’s expected to achieve compound annual underlying earnings growth of 6-8%. This could lead to significant share price appreciation and a big boost to dividends over time.
