Among income-focused investors looking for long-term passive income streams, National Grid (LSE: NG) commonly grabs attentions. Utilities in general are often associated with stable, predictable revenues. National Grid specifically aims to grow its dividend per share each year at least in line with a leading measure of inflation.
The attraction is that value in real terms should not fall over time. Whether it happens, of course, depends on how the business performs financially – and what it chooses to do with its dividend.
Here’s what the dividend could look like
Where inflation is going is always a tricky question to answer with any confidence. That is especially so the further into the future we look.
From the start of the 1990s to now, the average UK inflation rate has been around 2.8%. That is an average, so includes considerable lows and highs along the way. It is not necessarily a guide to what will happen.
Still, as an example, what would happen if National Grid raised its dividend per share by 2.8% each year for a decade? Currently, the dividend per share is 48.5p. At the current share price, that equates to a dividend yield of 4%. That is meaningfully above the 3.1% of the wider FTSE 100 index.
So 1,000 National Grid shares bought today would cost a little over £12k. Based on the current dividend (last year’s), that ought to earn around £485 a year in dividends.
Over £5k in payouts within a decade
Say National Grid grows the payout per share at 2.8% annually. A decade from now it would then stand at 63.9p. Over the coming decade, 1,000 shares ought to earn roughly £5,662 in dividends – around 47% of their current purchase price.
That is on top of any capital gain or loss from share price movements. The National Grid share price has grown by 43% over the past five years.
Dividends are never guaranteed – even for utilities
Is the dividend growth likely to happen? National Grid is large and benefits from a combination of ongoing demand and little if any competition in its key markets.
That may sound like a license to print money, which explains why utility pricing is regulated. In fact though, while National Grid has a proven ability to generate large operating cash flows, it also needs to spend huge amounts to maintain and adapt its sprawling infrastructure.
Ongoing shifts in where energy is produced and where it is used — after decades that saw little change in either — make that financially onerous right now. So onerous in fact, that National Grid’s net debt grew 7% last year to £44.2bn.
Last year also saw the company cut its dividend per share sharply, despite its longstanding aim of at least enough annual growth to match inflation.
That may put it on a sounder financial footing to assure future dividend growth. Or it may be that ongoing capital expenditure costs mean the dividend is cut again down the line.
Either way, there are higher-yielding dividend shares in today’s market that I feel have a better risk profile for my investing style, so I have no plans to invest in National Grid.
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Christopher Ruane has no position in any of the shares mentioned.
