Why I’d buy National Grid shares for my ISA

Roland Head explains why he’d add National Grid shares to a passive income portfolio, given the group’s growing exposure to renewable energy.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Windmills for electric power production.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Renewable energy is one of the hottest topics in investing right now. One side effect of this is that many popular renewable stocks look quite expensive to me. One exception is FTSE 100 utility National Grid (LSE: NG), whose share price is unchanged on a year ago.

Although National Grid doesn’t generate renewable electricity, its UK network will play an essential role in the race to net zero. National Grid shares also offer a tempting 5.5% dividend yield. I’m looking at this FTSE 100 stock as a potentially low-risk way to invest in the energy transition.

A return to growth?

There doesn’t seem to be much doubt that renewable energy will gradually displace fossil fuels over the coming decades. Motorists will switch to electric vehicles, while homes and businesses will gradually move away from gas.

Meeting this increased demand for electricity will require big upgrades to the UK’s electricity grid. So National Grid sees this as an opportunity to increase the growth rate of its business. The firm recently inked a deal to buy Western Power Distribution, one of the UK’s largest electricity distribution businesses.

Alongside this, National Grid also plans to sell a majority stake in its UK gas transmission business.

By increasing its exposure to electricity, National Grid’s management expect to be able to invest more in its network than it might have done with gas. This is important because of the way regulated utilities profits are calculated. Basically, UK utilities are allowed to generate a certain percentage return on the value of their regulated assets. More assets should mean higher profits, over time.

A no-brainer?

For someone like me who’s investing to build a passive income in a Stocks and Shares ISA, buying National Grid shares might seem like a no-brainer. Although I like the shares, I’m not sure that’s true.

One risk I can see is that regulator Ofgem could continue to put pressure on the return utilities are allowed to generate. Eventually, management might have no choice but to cut the dividend in order to protect the group’s credit rating.

A second concern is that National Grid shares have consistently lagged behind the market in recent years. While the FTSE 100 is up 10% from five years ago, National Grid shares have fallen by 13%.

If interest rates ever started to rise, I’d expect this gap to increase. When interest rates rise, investors often demand higher dividend yields. That could push the share price down.

National Grid shares: I’d buy

UK energy regulator Ofgem isn’t giving National Grid and its peers an easy ride. The latest pricing regime runs from 2021 to 2026 and has cut the returns energy utilities can make.

However, I think the group’s recent deal to buy Western Power and sell part of its gas business will help to neutralise the impact of these changes. Once the dust has settled, I expect the improved growth rate from NG’s electricity business to protect the dividend and support higher payouts in the future.

With a 5.5% dividend yield on offer and a history of inflation-matching increases, I’d buy National Grid shares for my income portfolio today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. 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.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »