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A ‘secret’ dividend stock I’d buy alongside National Grid plc

National Grid (LSE: NG) is, in my view, one of the best income stocks out there. The company has a highly defensive income stream that’s growing with inflation and expansion overseas is helping earnings expansion. 

Even though shares in the utility have recently come under pressure due to concerns about the government’s plans for the UK power industry, I believe there’s no immediate threat to the firm’s existence.  

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However, if you are concerned about National Grid’s future, then there’s one ‘secret’ dividend stock that I believe is a great alternative. 

Hidden income 

Boutique investment firm River & Mercantile (LSE: RIV) flies under the radar of most investors. Over the past five years, the company has gone from strength to strength as revenues have risen threefold, from £20m in 2014 to nearly £70m for the year ending 30 June 2017. Over the same period, earnings per share have expanded 194%, from 7.7p to 22.9p. 

Today the company reported yet more growth. According to a trading update for its fiscal first quarter, mandated assets under management increased by 2% to £31bn although fee-earning assets under management decreased by 1% following the restructuring of certain equity transactions.

Commenting on the numbers, CEO Mike Faulkner said: “Despite the markets at their current levels and with material uncertainties faced by investors we continue to see significant interest in this form of active equity risk management and synthetic structured equity solutions.”

Dividend growth is key 

So, it looks as if investors are still attracted to the company’s offering, which is good news for shareholders. 

As well as its impressive record of growth, River & Mercantile has a history of returning the majority of earnings to investors via dividends. For the fiscal year ending 30 June 2018, City analysts have pencilled in a dividend per share of 16.2p, giving a yield of 4.5%. The one downside of the company’s growth and income record is that the shares are quite expensive. The stock currently trades at a forward P/E of 19.5, but this is, in my view, is a price worth paying. 

National Grid is a slightly cheaper buy. The shares of this UK utility giant currently trade at a forward P/E of 15.6 and support a dividend yield of 4.9%. 

However, while the shares might be cheaper, the company lacks growth. Over the past five years, earnings per share have hardly budged. Some growth is expected over the next two years, but the majority of this expansion will come as a result of a lower share count. 

The company is currently in the process of spending £835m to buy back stock following the sale of its gas division. Even though earnings per share are set to rise, pre-tax profit will remain unchanged from the level reported for 2014. 

The bottom line 

Overall, I believe that National Grid remains an attractive income investment, but the one thing that the company is lacking is growth. With this being the case, River & Mercantile makes the perfect portfolio partner as this asset manager offers an exciting blend of both income and growth. 

Dividends account for half of equity returns

Research has shown that over the long term, dividends account for half of equity returns, which is why dividend stocks should always feature in your portfolio. You're putting yourself at a serious disadvantage if you avoid dividends altogether. 

For more dividend tips and insight, I highly recommend that you take a look at this free report

The report is entirely free and available for download today.

Rupert Hargreaves owns shares in National Grid. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.