Income Investors: Are National Grid Shares Worth Your Consideration?
Investors often seek reliable sources of income rather than solely focusing on share price growth. National Grid (LSE: NG) has emerged as a noteworthy option for those interested in consistent dividends. Over the past five years, National Grid’s shares have increased by 58%, mirroring the performance of the FTSE 100 index during the same timeframe. However, the company’s principal attraction lies in its dividend policy.
Dividend Strategy of National Grid
National Grid aims to ensure its annual dividend per share grows at least in line with a key inflation measure. This strategy intends to prevent the real value of dividends from declining over time, appealing to income-conscious investors.
Utilities: Stability and Risks
Utilities like National Grid are often perceived as safe investment choices due to predictable demand. However, this view overlooks essential risks associated with such investments. Although steady revenues are common, utility companies must regularly invest heavily to maintain and upgrade infrastructure.
- National Grid plans to invest £11 billion in the current financial year.
- The company’s market capitalization stands at approximately £61 billion.
- With net debt reaching around £42 billion, financial strain is evident.
To finance its expenditures, National Grid has incurred additional debt and previously issued new equity, which diluted existing shareholders’ stakes. Such financial maneuvers raise concerns about the sustainability of its dividend, especially since the company reduced its dividend payout by 20% last year.
Current Dividend Yield and Comparison
National Grid currently offers a dividend yield of 3.8%, surpassing the FTSE 100’s 2.9%. Despite its solid revenue generation capabilities, ongoing high expenditure requirements and a significant debt load could impact future payouts.
Alternatives for Income Investors
Given the evolving energy landscape and National Grid’s challenges, income-focused investors might find better opportunities elsewhere. Other shares in unregulated sectors could provide higher dividend yields and greater profit growth potential, all while maintaining lower levels of debt and capital expenditures.
In summary, while National Grid shares may be appealing due to their dividend history, the associated risks and recent payout reductions suggest that income investors should evaluate alternative options before committing their funds.
