Last year, many companies stopped paying dividends as the pandemic brought the global economic machinery to a halt. Not all of them, though. The FTSE 100 energy utility National Grid (LSE: NG) continued to be a source of passive income.
Healthy dividends and capital growth too
And these were not trivial dividends either. Over the past five years, the company’s dividend yield has averaged 5.2%. Right now the average FTSE 100 yield, which is the dividend payout expressed as a percentage of the share price, is 3.7%. This means that buying the company’s share is going to earn me around 150 basis points higher return than in the average index stock. The company also has a policy to increase its dividends in line with consumer price inflation, so that the real returns to shareholders remain unchanged. Of course, dividends are never guaranteed.
Additionally, investors who bought the stock last year have seen some capital gains as well. From this time last year to now, its price has risen some 12%. While this is a smaller increase than that for many other FTSE 100 stocks, it does offer stable dividends. And for long-term investors, National Grid has been even more rewarding in terms of capital gains. Its share price has risen more than 56% over the past 10 years.
Eye to the future
Further, I like that it is preparing itself for the future of energy. As the world tilts towards cleaner energy sources, the company is also streamlining its business to reflect these priorities. As my colleague Rupert Hargreaves recently pointed out, it is selling off its stake in the UK’s gas pipeline network. While gas is a cleaner fuel than other fossil fuels, like coal, it is still polluting, so renewable energy is preferable. National Grid is concentrating its attention on electricity instead. It has bought Western Power Distribution, which is the UK’s biggest electricity distribution network.
The downside to the FTSE 100 stock
The company is not without its challenges, however. While on the face of it, its numbers for the financial year ending 31 March looked healthy, the underlying figures were not so positive. This can be seen as a one-off because of Covid-19. As The Guardian pointed out in this report, as the pandemic happened its costs rose, revenues fell, and there was an increase in the number of households in the US that were able to pay their bills. All these factors likely affected full-year numbers too.
Ideally, I would like to see some recovery in its next set of numbers, since it would cover the economic recovery from the pandemic. A delay would be disappointing, though, because it is less easy to justify a planned increase in dividends for a company whose profits are falling.
That said, I reckon that in time things should look better for National Grid. And given its dividend history, passive income from it looks far more stable than that for a number of other FTSE 100 stocks. It is a dividend stock I’d like to buy.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended National Grid. 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.