A good gauge of whether I truly like a company is to ask whether I could see myself spending my last £100 on buying its stock. Today, I’m doing just that with FTSE 100 power provider National Grid (LSE: NG) shares.
For the uninitiated, the ‘Grid’ owns and operates the electric and gas transmission system in England and Wales. In addition to its home market, the company also serves over 20 million people through its networks in New York and Massachusetts.
Essential service
While what the company does is clearly essential, it’s quickly apparent that National Grid shares are unlikely to appeal to growth-focused investors.
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Sure, a 28% rise in the share price in the last five years feels adequate compared to the performance of the FTSE 100. Even so, it’s pretty poor relative to the performance of the glitzy US tech stocks.
One clear reason for this is that many investors don’t like capital intensive businesses. With so much infrastructure to consistently maintain, National Grid is a great example. This also helps to explain why it carries so much debt.
Furthermore, the company operates in a highly-regulated sector. So huge profits are not the order of the day here.
Notwithstanding all this, National Grid does have two particular attractions for me.
Why I like National Grid shares
The first of these is the passive income stream.
The relative stability of its earnings makes it possible for the company to return dividends to its owners. Importantly, these cash payouts tend to be raised every year by a few percent.
Right now, National Grid shares yield a chunky 5.5%. For perspective, that’s a lot more than the 3.7% yield of the FTSE 100 index.
Then again, you probably don’t need me to tell you that both of the above are below the rate of inflation. If beating that was my goal, I’d need to look elsewhere in the stock market, which may involve taking on more risk.
A second reason I like this company is that it tends to hold its own during tough economic times. Regardless of what’s going on, we still need access to power. This makes the shares something of a ‘bond proxy’.
This is not to say that the stock can’t fall in value. Indeed, the share price has bounced between the 800p and 1,200p range for years now.
So it’s important to never regard National Grid shares as being devoid of risk.
My verdict
Fortunately, I’m not currently down to the last £100 I’ve reserved for investing in the stock market and growing my wealth.
However, I certainly think there would be a good case for me to invest in National Grid shares with that money if I were primarily focused on generating income from my portfolio.
This income could then be spent on daily expenses. Or it could be reinvested back into buying more shares to benefit from the magic that is compound interest.
Obviously, I would still need to make a point of checking that I was suitably diversified into other companies and sectors before pulling the trigger here.
But if I were looking for capital gains, I’d be investing that money elsewhere.
