I’d buy 1,740 shares of this FTSE 100 monopoly stock for £1,000 a year in passive income

This Footsie stock has a tremendous record of paying out rising passive income. Here’s why I would invest in the shares today.

| 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.

Close up view of Electric Car charging and field background

Image source: Getty Images

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.

There aren’t many stocks about that can be considered to have ‘monopoly’ status. But National Grid (LSE: NG.) is one such stock. As the owner of the high-voltage electricity transmission network in England and Wales, it’s considered a ‘natural monopoly’. 

Here’s why I’d invest in the shares for passive income.

Created with Highcharts 11.4.3National Grid Plc PriceZoom1M3M6MYTD1Y5Y10YALL10 Sep 201810 Sep 2023Zoom ▾Jan '19Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '232019201920202020202120212022202220232023www.fool.co.uk

Steady away

The first thing to point out is that National Grid is regulated by Ofgem, the energy regulator. This government authority caps the amount the company can earn from charging suppliers for using its network.

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

This is a bit of a double-edged sword for investors. On the one hand, the payout rises slowly but steadily, averaging 3.84% a year since 2018. This isn’t ideal when inflation is running at much higher levels than that.

However, on the other hand, the utility giant’s cash flows are reliable and stable. This supports those steady dividend increases, even during times of economic uncertainty. Hence why National Grid is considered a defensive stock, with its service in permanent demand.

This stability is reflected in the share price, too, which has glided 23.6% higher over the past five years.

Created with Highcharts 11.4.3National Grid Plc PriceZoom1M3M6MYTD1Y5Y10YALL10 Sep 201810 Sep 2023Zoom ▾Jan '19Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '232019201920202020202120212022202220232023www.fool.co.uk

Passive income

This year (FY 2024), the utility company is expected to pay out 57.7p per share. That gives the stock a forward-looking dividend yield of 5.8%.

That means I’d need 1,740 shares to aim for £1,000 a year in passive income. Those would cost me around £17,250.

Admittedly, that is a sizeable sum of money. But I feel the firm’s stable earnings and excellent dividend track record make this an excellent candidate for passive income generation.

A portfolio pivot

Now, despite its steady core business, National Grid is actually undergoing major change. Last year, it agreed to sell a 60% equity interest in its UK gas transmission and metering business to a consortium of infrastructure investors. This year, it sold a further 20% stake to the same investors.

These sales form part of National Grid’s pivot towards electricity. And they follow its £7.8bn acquisition last year of Western Power Distribution (WPD), the UK’s largest electricity distribution business.

The company has set out four main reasons for these transactions:

  • Increase the proportion of portfolio assets in electricity from 60% to around 70%
  • Enhance its central role in the delivery of the UK’s net zero targets
  • Underpin 6% to 8% long-term asset growth
  • Maintain a strong balance sheet to keep its investment-grade credit rating and support a sustainable dividend policy

Heavy investment for the future

This last point about the balance sheet is worth highlighting. That’s because decarbonising the UK’s energy transmission infrastructure is an extremely costly undertaking. Indeed, its capital expenditure has nearly doubled since 2017.

Worryingly, the firm’s net debt has gone from £23.6bn in 2018 to over £40bn today. If that continues to creep up, with the associated costs of servicing it, the growth of the dividend could ultimately come under threat.

Nevertheless, I value the predictability here. Demand for energy, particularly as more electric vehicles need charging, is likely to increase. So, while no payout is guaranteed, I think this stock offers one of the ‘safer’ dividends I’m likely to find.

If I were building a passive income portfolio today, I’d include National Grid shares.

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

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.

Ben McPoland has positions in National Grid Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

A pastel colored growing graph with rising rocket.
Investing Articles

£2,000 invested in penny share Angle just 3 months ago would now be worth…

Angle (LON:AGL) is a small share that's skyrocketed in recent weeks. Why does this investor hold the high-risk penny stock?

Read more »

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

25% tariffs! Where next for the Diageo share price?

The Diageo share price continues to face a barrage of challenges. Should I just sell this struggling FTSE 100 dividend…

Read more »

Cheerful young businesspeople with laptop working in office
Investing Articles

Why investing in dividend stocks is my favourite way of earning a second income

Instead of trying to start a business, Stephen Wright prefers to earn a second income by investing in some of…

Read more »

Investing Articles

Which sectors’ stocks are most likely to increase their dividends in 2025?

Five Fool.co.uk contract writers speculate about where stock pickers might see the most significant dividend growth this year.

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How much would someone need to invest to earn £43,100 per year in passive income?

Building a portfolio that can fund a comfortable retirement using passive income takes time. But there are some ways to…

Read more »

Investing Articles

Has the overhyped S&P 500 had its day?

Like most investors, Harvey Jones has done very well out of his exposure to the S&P 500. But now he…

Read more »

Investing Articles

I asked ChatGPT to pick 3 brilliant FTSE value stocks and this is what it said

Harvey Jones is on the hunt for top FTSE 100 value stocks and decided to call in the robots to…

Read more »

Investing Articles

3 FTSE 250 REITs to consider for passive income in 2025

When considering shares to include in a passive income portfolio, many investors look to the stable and reliable dividend payments…

Read more »