Dividends At National Grid plc Are Very Attractive

Here’s why you can trust the steady cash from National Grid plc (LON: NG).

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nationalgrid1When it comes to the old dilemma of choosing between share price growth and dividends, some companies just shout dividends.

And with the bulk of its earnings being converted to cash in investors’ pockets via steady yields of around 5-6% over the past few years, National Grid (LSE: NG) (NYSE: NGG.US) is clearly one of them.

Income portfolio

I’ve often said that when you’re looking to build a long-term portfolio to provide you with steady cash a decade or more in the future, you should seek a mix of high current yields and strong dividend growth — and those with high yields today should be growing them at least in line with inflation.

Should you invest £1,000 in National Grid right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if National Grid made the list?

See the 6 stocks

Here’s what National Grid’s track record looks like:

Year
(to Mar)
Dividend Yield Cover Rise
2011 36.37p 6.1% 1.40x -5.5%
2012 39.28p 6.2% 1.27x +8.0%
2013 40.85p 5.3% 1.41x +4.0%
2014 42.03p 5.1% 1.58x +2.9%
  2015*
43.38p 4.8% 1.27x +3.2%
  2016*
44.67p 5.0% 1.30x +3.0%

* forecast

Terrific yields

Those are very high yields, and they’re keeping ahead of inflation, which means shareholders are getting real increases in their income each year. The yield is set to drop to 4.8% this year only because the share price has risen by 20% over the past 12 months, to 909p.

In fact, over five years the National Grid share price has climbed more than 70%, easily beating the FTSE 100 average at just under 40% — and that’s a nice bonus.

And even though National Grid shares have only recently set a new 52-week record, they’re still only on a forward P/E of 16.3 for the year to March 2015, dropping to 15.6 based on 2016 forecasts. For such a quality a company with a very low-risk future, that doesn’t seem stretching at all.

Dividends at risk?

The energy sector is entering a bit of a troublesome period, with political and regulatory pressure making it pretty much impossible to raise prices in the near term. So how is that likely to impact dividend growth?

Well, when the company released its 2014 results in May, chief executive Steve Holliday said “…we continue to build a stronger business from which to deliver healthy returns, and good organic growth to support our commitment to sustainable dividend growth“.

Ignore at your peril

If you’re aiming to build a solid income portfolio, I reckon you’d be mad to overlook National Grid as a potential candidate — and you’re likely to get comfortable share price performance over the long term, too.

But here’s another bargain investment that looks absurdly dirt-cheap:

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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