The National Grid (LSE:NG) share price has fallen 7% since the beginning of 2022. Based on current dividend forecasts, National Grid shares carry a 5.5% forward dividend yield.
This figure comfortably beats the 3.7% average for FTSE 100 shares. And the yield marches to 5.8% for the next financial year.
Should you invest £1,000 in National Grid right now?
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But can I trust current dividend forecasts? And should I buy the company’s shares for my portfolio in 2023?
Dividend growth
National Grid has remained a reliable dividend payer in recent years. Even during the height of the pandemic it continued raising shareholder payouts as other UK shares reduced, cancelled, or postponed their own.
City analysts are expecting dividends here to continue rising in the short-to-medium term too. A full-year reward of 54.61p per share is forecast for this financial year (to March 2023). That’s up from the 50.97p shelled out last year. And the total dividend is tipped to rise to 57.5p in fiscal 2024.
Weak cover
At first glance, National Grid’s dividend forecasts look a little fragile though. For this year and next, predicted payouts are covered just 1.3 times by expected earnings. These figures are well below the minimum safety margin of 2 times I seek when buying income stocks. It leaves predicted dividends in danger if trading conditions suddenly nosedive.
However, National Grid isn’t like most income stocks. In fact, weak dividend coverage is a common feature for the utilities business. Yet it’s still regularly raised the annual dividend for more than two decades.
Case for the defence
The company’s proud record is thanks to the highly defensive nature of its operations. This gives it the means and the confidence to consistently increase shareholder payouts.
Keeping Britain’s power lines, pylons and substations in working order is an essential service. On top of this, National Grid has a monopoly on what it does, protecting it from the threat of competitors.
Profit risks
There’s no such thing as a risk-free dividend share, of course. Maintaining the country’s power grid is an expensive business. It’s getting more costly too as extreme weather events batter electricity infrastructure.
Meanwhile, the business faces colossal capital expenditure bills as the UK transitions towards net zero. It recently said that five times more new electricity transmission infrastructure will be required in next seven years than has been delivered in the past three decades.
The verdict
Both of these threats could weigh on profits (and by extension, dividend growth) in the years ahead. But the firm’s in great shape to provide market-beating payouts at least to the end of fiscal 2024. And current dividend forecasts for National Grid are reinforced by its impressive cash generation. Net cash from operating activities rose 5% (to £2.5bn) in the six months to September.
On balance, I think National Grid remains a top stock to own for passive income. And especially during this tough economic period when dividends from less defensive UK shares could disappoint.
