FTSE 100 company National Grid (LSE: NG) has a long record of paying steady dividends. And for me, that’s the main reason to buy some of the shares now.
But can the stock double my money? It’s possible. And here’s how it could happen.
Compounding dividend returns
With the share price near 1,046p, the dividend yield for the current trading year to March 2022 is around 4.8%.
To help explore the potential, I’m assuming the company will keep paying a dividend at the same rate for years ahead and the share price won’t move up or down. In reality, both those numbers will likely vary.
But I could buy the stock now and reinvest the stream of dividends with the aim of compounding my investment. And punching the numbers into a compound interest calculator reveals the investment would double after 15 years.
But the share price and dividend will almost certainly not remain as they are today. There’s an obvious risk that both could fall over time. And it’s even possible for the company to stop paying dividends altogether. After all, company directors have the power to do whatever they like with shareholder dividends.
However, there’s also an upside scenario I find attractive. Indeed, the share price and the dividend payment could both rise in the years ahead. And if that happens, the doubling time for my investment would shorten.
One of the factors making me optimistic is the firm’s long record of steady trading and finances. The business occupies a regulated monopoly position at the heart of the UK’s energy infrastructure with both electricity and gas operations. And it has regulated operations in the USA as well.
Borrowings versus dividends
To me, the energy sector is attractive because it tends to experience reliable and predictable demand. So it can be a straightforward process for the company and regulators to plan ahead. And, so far, regulators have not required National Grid to reinvest a crippling amount of money into its infrastructure networks.
However, regulatory risk is worth considering when holding the stock because conditions could change. And it’s possible ongoing shareholder dividend payments could be threatened if National Grid can’t afford them.
The company has to service debt interest and shareholder dividends. And the balance could become difficult to maintain if borrowings rise too far because of onerous regulatory demands.
However, National Grid and its regulators have the ability to raise prices to accommodate rising costs. So, on balance, I see the economics of the business as attractive. And the push for a low-carbon world economy could drive revenue growth in the years ahead. For example, the use of electric vehicles seems set to rise.
After some consideration, I think National Grid shapes up as a decent-looking stock to hold with the aim of doubling my money in the years ahead.
