Before I invest any hard-earned money in a stock with the aim of securing long-term passive income, I like to run through a few checklist items.
Not everything will come out tops on every one. But the more passes than fails the better, and it helps me sort my options into some kind of priority.
I’ll run through it today with a stock from my candidates list, National Grid (LSE: NG.)
Check 1: dividend
Is a dividend essential? Anyone who bought Rolls-Royce Holdings shares in 2020 could sell some for cash now. And they’d potentially get more passive income than from 20 years of National Grid dividends.
But dividend stocks tend to be less risky and require less attention. I buy stocks in the hope of never having to think about when to sell.
National Grid has a forecast dividend yield of 4.3%. It’s not the biggest in the FTSE 100, but it’s reasonable and it passes check #1.
Check 2: cover
I want to feel reasonably assured that a company can keep paying its dividends from earnings.
National Grid hasn’t always managed to do this. But over the long term, we’ve seen earnings covering the dividend around 1.1 to 1.2 times, reaching 1.3 times for the 2025 year just ended.
Again, that’s not the best. But there’s good long-term earnings visibility, which can mean less earnings safety margin needed. Check #2 is good enough for me.
Check 3: history
Saying that, 2025 cover was higher because the company cut its dividend per share. The total cash payout was the same, but last year’s surprise equity raise to generate new capital meant more dilution per share.
Prior to that we’d had many years of solid progressive dividends. And I would, perhaps naively, have thought a cut was near impossible. I now fear the possibility of further equity issues causing more dilution. I’m unsure, so I’ll go 50/50 on #3.
Check 4: forecasts
Looking forward, the company has reiterated its aim to pay more in dividend cash each year. And forecasts currently bear that out, showing 1.8% and 2.2% increases for 2026 and 2027, respectively. They’re not big jumps, but should hopefully match inflation.
I’d ideally like to see few more years of National Grid back to progressive dividends without any further dilution. But I give it a cautious pass on #4 for now.
Check 5: debt
I always check debt for every company I consider, as it can impact the dividend during a tough spell. National Grid’s net debt reached £41.4bn in 2025. And it’s forecast to reach as high as £52.8bn by 2027, for a 27% increase in just two years. Check #5 is a clear fail.
Verdict
These checks aren’t comprehensive. And every company will have its own specific risks which we really need to investigate. But I see this as a handy start.
I’ve sometimes thought of National Grid as possibly the best dividend stock I’ve never bought. But it only scores 3.5 out of five (and one of those is cautious). I still think passive income investors should consider it. But in the short term, other stocks score better on my checklist.
