National Grid (LSE: NG) is a regulated monopoly that transmits electricity and gas across the UK. It also has similar operations in the northeast of the US.
While that may sound ‘boring’, the firm is a steady dividend machine. As such, I reckon this makes it an ideal candidate for increasing my passive income.
Steady away
The thing I like about National Grid shares is their defensive, almost sleepy quality. They’re not going to double in quick time, but neither are they likely to lose half their value in a single day (though nothing can ever truly be ruled out).
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That’s why I own the stock in my own portfolio. It’s a steady investment, with a 175% share price return over the last 20 years. That’s a compound annual growth rate (CAGR) of 5.25%, excluding dividends.
If I also factor in shareholder payouts, which would have added to the total return, then I’m looking at a very respectable long-term investment.
But all that’s in the past. What about the present and, more importantly, the future?
Changing strategy
National Grid has been undergoing a strategic pivot towards cleaner energy in recent years. This has included selling some gas operations to focus more on electricity. As a result, its portfolio will soon be 70% weighted towards electricity.
This seems sensible to me, given that the UK’s demand for electricity is forecast to increase by 70% over the next 25 years. Much of this will be driven by the mass adoption of electric vehicles and the constant need to charge them.
However, ahead of its full-year results next month, the company said it expects this year’s earnings per share (EPS) growth to land near the bottom of its previously guided 6%-8% range.
That’s because a change in government tax treatments will have a “net adverse impact” on its underlying earnings up to 2026. This highlights how fiscal and regulatory changes can quickly impact its financials, which is something worth bearing in mind.
That said, the company is still permitted to earn a decent profit in return for its investments in upgrading and decarbonising the UK’s energy network. This makes its earnings predictable, which translates into a reliable dividend.
Nevertheless, I wouldn’t bank on big increases to the payout every year. That’s because decarbonisation is to cost the utility firm £29bn up to 2026.
Partly due to these investments, the company also has £45.6bn in net debt, which creates additional risk now that interest rates are higher.
Passive income
The current dividend yield stands at 4.5%. At today’s share price, the yield rises to around 4.9% if the dividend forecast for FY2023 (which ended 31 March) is correct.
So what does that mean?
Well, I’d need approximately 1,830 shares to generate £1,000 a year in passive income. Today, those shares would cost me around £20,450.
Now, that’s obviously a hefty sum of money. My own holding certainly isn’t that large!
But I’ve been building up my position for a while now, opportunistically adding when Mr Market turns fearful.
While no dividend is guaranteed, I think National Grid’s payout is as dependable as any around.
As such, if I didn’t already own this stock, I’d add it to a well diversified income portfolio today.
