Different investors have different objectives. While some people like the idea of buying dividend shares to generate passive income, one concern can be that dividend growth will not keep up with inflation.
That helps explain why National Grid (LSE: NG) aims to grow its dividend per share each year in line with a key measure of inflation. The idea is that, over time, the National Grid dividend will hold its value in real terms, no matter what is going on with inflation.
As an investor, that idea grabs my attention. But is it realistic – and does it make sense for me to buy some National Grid shares for my portfolio?
Three elements to an investor’s return
Dividends can be a welcome source of income for investors over time, but they are only one part of the equation. The total return is also impacted by share price gain or loss, albeit until the investor sells the shares that is just a paper gain or loss.
Over the past five years, the National Grid share price has moved up 46%. That is impressive – and exactly in line with the performance of the broader FTSE 100 index (of which National Grid is part) during that period.
A third aspect of an investor’s total return is the cost of buying, holding or selling shares. Different platforms have their own cost structures, so it can pay to choose carefully when coming to choosing a share dealing account, Stocks and Shares ISA or trading app.
I’m nervous about the dividend
While National Grid aims to grow its dividend each year, no share’s dividend is ever guaranteed to last. Just last year, the National Grid dividend per share was cut significantly. So while the board may want to keep growing it in line with inflation, investors have already had a reality check when it comes to funding that.
The company has a monopoly position in some of its markets, strong customer demand and also the ability to raise prices over time. So there could be regular dividend growth in line with inflation in future.
But, as last year showed, that cannot be taken for granted. Maintaining let alone updating National Grid’s infrastructure is a costly business. The company raised cash in a rights issue in 2024, diluting shareholders, and last year it cut its dividend. Despite those moves to marshal resources, it is still sitting on a large debt pile.
No plans to buy
Even if I lack confidence in the long-term sustainability of the dividend, what about the underlying business? After all, it does have strengths like the ones mentioned. The share price performance has been strong in recent years, though that is not necessarily an indicator of what to expect in future.
The price-to-earnings ratio of 20 is too high for my tolerance. This is not some racy growth stock, but a mature company with sizeable debt and ongoing heavy capital expenditure requirements. Revenue last year actually fell, for the second year in a row.
At its current price, I have no plans to buy the share.
