How Strong Are National Grid plc’s Dividends?

national gridCash and more cash, that’s what investors in National Grid (LSE: NG) (NYSE: NGG.US) are typically looking for — and the company has rewarded them handsomely.

Back in 2010, National Grid shares provided a whopping 6.7% dividend yield. And that yield has fallen in the years since simply because the share price has been rising — over the past five years it’s up 75% while the FTSE 100 has only just managed to beat 50%.

Beating inflation

In that same time, the actual cash handed out each year has been lifted ahead of inflation, and the 42p per share paid for the year ended March 2014 still yielded 5.1% — still up with the best in the market.

In its full-year report released in May, National Grid told us that its dividend hike of 2.9% was based in RPI inflation, and tracking that measure is its longer term goal.

We were also told that the firm’s scrip dividend option is popular, but that the board does not want to see too much dilution as a result — and so it will seek to balance scrip issues with buybacks in order to better manage per-share metrics.

More to come

Forecasts suggest a 3% dividend rise for the current year to around 43.3p, with the same again pencilled in for March 2016 to take it to 44.6p. On the current share price of 867p, that would provide yields of 5% and 5.2% respectively.

Dividend cover is lower than for some companies — we saw the dividend covered 1.6 times by earnings in the last full year, with forecasts suggesting 1.3 times for this year as earnings are expected to drop, followed by similar cover for 2016.

National Grid enjoys a very predictable business model, with demand known well in advance and prices negotiated through long-term contracts, and so it really is able to pay out a large proportion of each year’s earnings as dividends.

In great demand

People will pay for such reliable income, and that’s why the shares are on a higher-than-average forward P/E of 16 for the current year, dropping to 15 for the year after.

But that still looks like a modest valuation to me, and if you want to be sure of a steady dividend income from your investments, I don’t think you can play much safer than going for National Grid.

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Alan Oscroft has no position in any shares mentioned.