National Grid’s share price has fallen 10%+ this month. Should I buy the stock for its big dividend now?

After a recent share price fall, National Grid shares now sport a dividend yield of 5.6%. Is that a huge opportunity in this low-interest-rate environment?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

National Grid (LSE: NG) shares have experienced a pullback this month. In the space of just over a week, National Grid’s share price has fallen from near 1,000p to 866p.

After that pullback, National Grid shares now sport a dividend yield of 5.6%. That’s certainly attractive in the current low-interest-rate environment. Should I buy the stock now to pick up that high yield? Let’s take a look at the investment case.

National Grid shares: a reliable dividend investment

In the current environment, in which economic uncertainty is elevated, I can definitely see some appeal in owning a stock like National Grid.

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

Utilities is a very defensive sector. No matter what the economy is doing, we still need essential services such as electricity and gas. Utility companies also often operate under the protection of government regulations, which adds further resilience. What this means is that utility companies are generally able to generate relatively steady profits and cash flows throughout the economic cycle. This translates to reliable dividends.

This year, National Grid certainly hasn’t disappointed on the dividend front. While many other FTSE 100 companies, including the likes of Royal Dutch Shell, BT Group, and Lloyds Bank, have suspended, cancelled, or trimmed their dividends, National Grid has lifted its payout. Recently, in its full-year results, the group announced a 2.6% increase in its dividend, to 48.57p per share, in line with its policy to increase the payout at least as much as RPI inflation. That’s an impressive achievement, given the economic environment.

National Grid: dividend analysis

Taking a closer look at National Grid’s dividend, however, I do have some concerns. For a start, dividend coverage isn’t high. Last year, National Grid generated underlying earnings per share of 58.2p. This means the dividend coverage ratio (earnings per share divided by dividends per share) was just 1.2. That’s quite low. Ideally, I like to see a dividend coverage ratio of at least 1.7. The higher the ratio, the less chance of a dividend cut in the future.

Secondly, National Grid has a large amount of debt on its balance sheet. In its full-year results, the company said it had net debt of £28.6bn and was expecting this to increase by around £3bn this year. By contrast, total shareholders’ equity was £19.6bn. This amount of debt adds risk to the investment case.

Finally, I’ve some concerns about the level of growth here. Over the last three years, revenues have fallen by around 3%. That’s not ideal. Revenue growth drives dividend growth. On top of this, British energy regulator Ofgem has said it wants UK energy network operators to invest £25bn from 2021 to 2026 to deliver emission-free energy. This could hit National’s Grid’s profits.

NG shares: my view

Weighing everything up, I’m going to pass on National Grid shares for now. The dividend yield of 5.6% is, no doubt, attractive. However, all things considered, I think there are better dividend stocks to buy at the moment.

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.

Edward Sheldon owns shares in Royal Dutch Shell and Lloyds Bank. The Motley Fool UK has recommended Lloyds Banking Group. 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.

More on Investing Articles

Investing Articles

10% dividend yield! Here’s a FTSE 100 share to consider in April for passive income

This FTSE 100 stock just soared past the 10% yield mark, making it a potentially lucrative option for investors targeting…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

3 FTSE 100 safe haven stocks to consider as trade wars bite

I'm confident in the long-term outlook for the FTSE index of stocks. But these blue chips may protect investors from…

Read more »

Investing Articles

Here’s how Trump tariffs could hand us some top passive income bargains

As tariff terror grips the stock market, it's time for passive income investors to steel our nerves and look for…

Read more »

Investing Articles

These FTSE shares may offer some safety as Trump slaps tariffs on trading partners

FTSE shares moved lower on 3 April, after US President Donald Trump introduced hefty tariffs on its trading partners. These…

Read more »

Investing Articles

6.8% dividend yield! Consider these 2 ‘secret’ passive income stocks to target a £1,360 payday in 2025

Looking for ways to generate above-average dividend income? These lesser-bought income stocks are worth a close look.

Read more »

Elevated view over city of London skyline
Investing Articles

The M&G dividend yields over 10% — and could get higher!

Christopher Ruane explains why he's upbeat about the long-term outlook for the M&G dividend yield and would happily buy the…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

2 popular UK growth stocks I wouldn’t touch with a bargepole in today’s market

Buying growth stocks can deliver market-beating returns, but this FTSE 250 pair doesn't look like a convincing investment for our…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

10 FTSE shares falling today after President Trump’s tariffs bombshell!

Our writer explains why JD Sports Fashion from the FTSE 100 and a diverse bunch of other UK stocks are…

Read more »