If I had to pick just one dividend stock in the FTSE 100 to buy today, I would buy National Grid (LSE: NG).
While there are plenty of other stocks in the UK’s leading blue-chip stock index which may have appeal as income investments, none have the same qualities as National Grid, in my opinion.
FTSE 100 dividend stock
The company owns the vast majority of the electricity transmission infrastructure in the UK. It also has a large US division.
This year the enterprise has been focusing on reinforcing its position in the UK market. In March, it announced the acquisition of Western Power Distribution (WPD), the largest UK’s electricity distribution business. The competition authority has just approved this deal.
To fund the acquisition, management is disposing of the group’s stake in the UK’s gas pipeline network. The enterprise has also sold Rhode Island-based Narragansett Electric Company for £2.7bn.
These deals will help boost the company’s position in the UK electricity market and reduce exposure to hydrocarbon energy such as gas.
The FTSE 100 company is preparing for a future where the majority of the UK grid is powered by renewable energy. And as the country transitions away from hydrocarbon energy to cleaner, greener power, electricity demand may only increase.
For example, devices such as gas boilers will have to be replaced for the UK to meet its carbon reduction goals. Electric boilers are one option and air source heat pumps are another, although these may not be suitable for all homes.
Therefore, as the country transitions away from hydrocarbon energy, I think National Grid’s role will only become more critical. This could lead to increased profits and additional distributions from the FTSE 100 dividend stock.
Risks and challenges
Unfortunately, additional regulations will always be a threat to this company’s success. National Grid is so big and so important, regulators cannot afford to ignore the business.
Moreover, considering the company’s role in the transition towards green energy, effective regulation is already becoming a political issue.
Regulators could force the company to spend more on specific projects or reduce cash payouts to investors. This is one risk I will be keeping an eye on as we advance.
Still, despite this risk, I think the FTSE 100 dividend stock remains incredibly attractive as an income investment. At the time of writing, the stock supports a forward dividend yield of 5.2%. This is backed up by the steady income stream from the electricity infrastructure that underpins the company’s business model.
As demand for electricity increases, I think the FTSE 100 company’s income will likely increase as well. This will provide additional capital for management to either return to investors or redeploy back into the business.
Whichever course management decides to take, investors should benefit overall. Additional reinvestment should increase growth in the long term, while a dividend hike will put more cash in investors’ pockets. Those are the reasons why I would buy the company for my portfolio today.
