One of the reasons some investors like buying energy distributor National Grid (LSE: NG) shares is the income potential. The shares currently yield 3.4% — and the company aims to grow its dividend per share each year in line with a key measure of inflation.
If it can deliver on that goal, it could mean that someone buying some National Grid shares today could effectively have them pay for themselves over the course of time, thanks to dividends.
How much might 100 of the shares earn in dividends?
For example, at the moment, what we call the trailing (that is, last year’s) dividend per share is 46.7p.
Based on the interim dividend this year though, the full-year dividend ought to be roughly 48.2p per share.
So, 100 shares should generate some £48 of dividends. At the current price, 100 National Grid shares would cost around £1,373.
The current rate of inflation (using the Consumer Prices Index measure that the utility aims to match) is 3.4%. As we have seen in the past few years and many times in the past, inflation can move around quite a lot.
But sticking with that 3.4% figure for illustrative purposes, say that the National Grid dividend per share keeps growing by 3.4% annually.
On that basis, it would take 21 years for the dividends to cover the cost of those shares today. In fact, after that period the total dividend earnings ought to have been around £1,443, so they would have covered the cost of the shares with around £70 to spare.
A business with a long-term future
Of course, dividends are only one way a shareholder might make money from an invrstment.
If someone bought 100 National Grid shares today and held them for 21 years, they would still own those shares at the end of that period.
Hopefully there would be some price gains over the current price, but this is never guaranteed as shares can lose value as well as gain it.
Over the past five years, National Grid shares have gained 77% in value.
I think that is good and it comfortably beats the 58% growth in the same period produced by the FTSE 100 index, of which the company is a member.
Past performance is never necessarily an indication of what to expect in future. But as a long-term investor, I am bullish about the growth opportunities for National Grid.
I expect power demand to rise over coming decades thanks to power-hungry trends like the use of AI. National Grid is uniquely well-positioned to move electricity from where it is generated to where it is used, thanks to its distribution networks.
A fly in the ointment
But despite that, I will not be buying any National Grid shares for my portfolio. At 24 times earnings, they do not look attractively priced to me.
With a lot of debt already and the need to keep spending to keep its network up to date, I also see a risk to the dividend.
Indeed, It was cut last year – and the same may happen in future, even though the company aims for annual growth in its dividend per share.
