Despite last week’s stock market rebound, UK stocks still look cheap to me. If I had nothing in my Stocks and Shares ISA, I’d be looking to fill it up as soon as I had money to spare.
Starting from scratch, I’d start by playing safe. One option would be simply to buy a FTSE 100 tracker, or FTSE All-Share tracker, to spread my risk across hundreds of stocks. But I prefer to buy individual shares instead.
It’s time to go on grid
There are loads of dirt-cheap dividend stocks I’d love to buy on today’s FTSE 100, but if I was making my first purchase I would play safe. I would go bargain-hunting later on, when my ISA is fuller and I can afford to take on more risk.
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I’d start by purchasing £38.8bn energy utility National Grid (LSE: NG). The energy distributor is a rarity these days as it holds a monopoly over much of its operations. Better still, it supplies a fundamental component of modern life, electricity. Anyone who’s suffered a power cut knows how much we depend on it.
This also means the bulk of its earnings are subject to statutory regulation, offering more security while also limiting its growth prospects. Investors will never make a million on this stock.
National Grid isn’t particularly cheap. Currently it trades at 16.46 times earnings, notably higher than the FTSE 100 average of 9.9 times earnings. It always seems fully valued, which I see as a mark of its dependability. If I was to delay purchasing National Grid until it was cheaper, I could be waiting a long time.
The big attraction is the dividend. Today’s 5.3% yield is comfortably above the FTSE 100 average of 3.68%. National Grid’s payout is covered just 1.2 times by earnings, which is thin. Typically, I like my dividends covered twice. Like many utilities, it gets away with that because its earnings are relatively dependable.
Recent history reassures me because management has steadily increased the payout year after year, from 47.34p in 2019 to 55.44p last year. This would give me a steadily rising income over time, which I’d reinvest back into the stock today, and draw as income when I retire.
The stock has been rising too
Another concern is that the company had £42.8bn of net debt on March 31 2022, and expected to issue another £5bn across 2023. Servicing costs will have risen due to higher interest rates. This would normally terrify me.
BT Group has half that amount, and I wouldn’t touch it as a result. National Grid is a different beast though. It needs to borrow to invest in its network of wires and pipelines, and its credit retains a BBB+ investment grade rating. Repayments seem well supported by cash flow forecasts, but it does worry me slightly.
Another potential downside is that it can’t make too much money, or it will be accused of profiteering. Politicians could get involved. Things could turn nasty.
Over five years, National Grid’s share price is up a steady 25.33%, with all dividends on top. It’s down 2.5% over 12 months. I could argue that this is a buying opportunity, but I won’t. It’s always a good time to buy National Grid shares, in my view.
