£10,000 of National Grid shares could net me a £1,683 yearly passive income!

Dividends on National Grid shares are poised to topple this year. But considering this FTSE 100 firm could still create a healthy long-term passive income.

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National Grid (LSE:NG) offers one of the largest dividend yields on the FTSE 100, above 4.5%. Utilities stocks like this are often popular with income seekers, as their defensive operations give them excellent earnings visibility, and therefore the means to pay a stable dividend over time.

However, this hasn’t been the case with National Grid more recently. More specifically, it’s been forced to cut cash rewards for this financial year (to March 2025) to raise funds for future investment.

In fact, the power grid operator’s planned dividend reduction this year means it would have cut payouts three times since 2010, as the chart below shows.

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National Grid's dividend history.
Source: TradingView

The good news, however, is that City brokers think dividends on National Grid shares will rebound immediately following this year’s cut.

With this in mind, how much passive income could I make with a £10,000 investment today?

Growing yields

To quickly recap, National Grid’s dividend per share for this year will drop following its £6.8bn share placing in May. It issued new shares to help it fund a £60bn five-year growth drive to decarbonise the UK’s power network.

City analysts think the total dividend will fall 20% year on year, to 46.78p per share. But they also believe dividends will rise thereafter, in line with National Grid’s plans. The company intends to increase payouts in line with the rate of consumer price inflation including owner occupiers’ housing costs (CPIH).

Financial yearDividend per shareDividend growthDividend yield
202546.78p-20%4.6%
202647.78p2%4.7%
202749.18p3%4.8%

Even if dividends fail to rise again beyond 2026, I could make a healthy passive income with a £10,000 investment today, if these estimates are correct.

A £1,683 second income

If I invested that lump sum today, I should make £480 in the 12 months to March 2026.

This would become £4,800 over a 10-year horizon. And over 30 years I could net a very healthy £14,400.

However, I may have a chance to make an even better second income over that time. How? By reinvesting any dividends I receive, and thus growing my pot exponentially thanks to the mathematical miracle of compounding.

This strategy would make me £6,145 over 10 years, and £32,086 during the course of three decades. Added to my £10,000 initial investment, my portfolio could be worth a total £42,086, assuming that National Grid’s share price remains stable.

If I then chose to draw 4% of this amount down, I’d have an annual passive income of £1,683.

A solid pick?

National Grid's share price.
Source: TradingView

Given National Grid’s growth plans, there’s no guarantee that dividends won’t fall again. The expensive nature of its operations also means future payouts could be in peril.

But over the long term, I’m optimistic that dividends could grow strongly, underpinned by the firm’s plan to grow its asset base by 10% a year. This could also lead to healthy share price gains and a robust overall return.

National Grid’s investors haven’t had an easy time of late. However, on balance, I still think it’s a dividend stock worth serious consideration today, underpinned by its excellent defensive qualities.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended National Grid Plc. 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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