The Motley Fool

2 safe FTSE 100 shares with dividend yields above 4%

Today, I’m taking a look at two FTSE 100 shares that I believe offer solid long-term dividend growth potential.

Regulated monopoly

First up is National Grid (LSE: NG), the UK’s largest listed utility company. With a relatively low beta of just 0.48, its shares tend to be less volatile than the wider index, which suggest that National Grid is a less risky investment.

Sign up for FREE issues of The Motley Fool Collective. Do you want straightforward views on what’s happening with the stock market, direct to your inbox? Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio. Click here to get started now — it’s FREE!

One of the biggest advantages for National Grid, and which explains why it has such a low-risk business model, is the exceptionally high initial costs needed to build infrastructure for electricity transmission and gas distribution. This makes National Grid a natural monopoly, which means it faces no competition whatsoever.

Instead, nearly all of its revenues are regulated by Ofgem, via the RIIO regulatory framework, which determines how much the company is allowed to earn on investments made to its infrastructure assets. These revenues are linked to RPI inflation and don’t depend on volumes or commodity prices. This results in the company generating stable earnings and cash flows year-on-year, and means its shares have staying power.

The company is undergoing a major transformation, which should reinforce its status as a ‘shareholder friendly’ company. In December, the company agreed to sell a 61% stake in its gas distribution network, which should allow it to focus on its faster-growing electricity transmission business.

The sale received the green light from the European Commission last week, which means the deal is expected to close in the coming weeks. And once completed, National Grid intends to return £4bn of its net proceeds to shareholders via a combination of a special dividend and share buybacks. Additionally, National Grid’s rate of earnings growth should pick up following the deal, and that would be further good news for dividend investors.

Annual dividends per share have increased more than 60% over the past decade, with a compound annual growth rate (CAGR) of 5.0% over the past 10 years. Looking forward, National Grid has pledged to grow ordinary dividends at least in line with RPI inflation for the foreseeable future, following a share consolidation later this year, intended to reflect its smaller asset base following the sale of its gas network.

At a current price of 995p a share, National Grid has a dividend yield of 4.5%.

Diversified business model

GlaxoSmithKline‘s (LSE: GSK) dividend safety comes from a combination of two factors: the non-cyclical nature of demand for pharmaceutical products and the company’s unique diversified business model.

In addition to the traditional pharmaceutical business, GSK owns a large consumer healthcare businesses, which generates more than a quarter of its revenues, and a sizeable vaccines business, which accounts for another 16% of group revenues. Together, these two businesses account for a growing proportion of GSK’s revenues and a majority of its earnings growth in recent years.

An anticipated 9% earnings rise at GSK this year gives its shares a reasonable forward P/E rating of 15.4 times. And this would fall to 14.7 times in 2018 on forecasts of further earnings improvement of 4%. With an improving earnings outlook and strong diversification, I reckon GSK represents a great pick for long-term income investors.

5 shares to retire on?

If you're looking for reliable dividend stocks, The Motley Fool has a free special report that's aligned with your investing goals: The Fool's Five Shares To Retire On.

These five large-cap shares have been selected for their combination of income and growth prospects. They generate stable cash flows from their dominant market positions and broad global exposure.

It's completely free and there's no further obligation. Get your copy now.

Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.