National Grid (LSE:NG.) shares are among the most popular with UK income investors, and it’s easy to see why. The energy transmissions operator is a regulated monopoly, with stable cash flows and an essential role in the nation’s infrastructure.
This has helped the FTSE 100 stock rise around 27% in the past year, and 60% over five years. Add in dividends, and the five-year annualised return is actually around 13.6%, which is almost identical to the FTSE 100.
That’s solid. But it’s steady income that investors value from National Grid. With this in mind, how many shares are needed to aim for a grand a year in passive income?
Dividend forecast
Over the next 12 months, National Grid is forecast to yield just under 4%. This means an investor would need approximately 2,055 shares to aim for £1,000 in annual passive income.
The bad news is that at the current market price near £12.50, these shares would cost roughly £25,650. That’s more than the entire yearly Stocks and Shares ISA allowance.
The good news is that the payout is comfortably covered nearly two times over by expected earnings. While no dividend is guaranteed, this suggests a decent margin of safety.
It supports the widely held view that National Grid is one of those sleep-easy-at-night dividend stocks.
Huge debt pile
In November, the company reported that half-year underlying operating profit at constant currency increased 13% to just over £2.3bn.
However, net debt rose £0.5bn to £41.8bn, reflecting massive ongoing capital expenditures to decarbonise the grid.
Indeed, National Grid has committed to spending £60bn between 2024/25 and 2028/29 on enormous amounts of new pylons, overhead cables, substations, and subsea cables. This is to accelerate “the transition to a net zero economy, to make Britain a clean energy superpower“.
As part of this, it has partnered with TenneT to develop a power link connecting German and British offshore wind farms in the North Sea to supply both countries with energy.
In December, regulator Ofgem published its Final Determination for the RIIO-T3 framework. This will dictate how much profit National Grid is allowed to make from its UK electricity transmission business between April 2026 and March 2031.
The proposals include a baseline return on equity of 6.12%, up from around 4.3% today. In principle, this could help support decent-ish dividend growth moving forward.
More shareholder dilution possible
Speaking personally, National Grid’s level of spending and debt puts me off. In 2024, it diluted some shareholders to raise capital, and I fear it could happen again.
After all, large infrastructure projects in the UK are notoriously difficult to finish on time and budget. The planning system — and local communities — are rarely accommodating of such things.
As such, I fear dividend growth won’t be that attractive moving forward. Looking at the forecast for FY27, the payout is tipped to grow less than 3% (barely above inflation).
Finally, the valuation doesn’t look particularly cheap to me. Right now, the stock’s trading at around 20 times earnings, while offering a starting yield of just 3.8%.
In my view, there are better FTSE 100 dividend stocks to consider today.
