In May, National Grid (LSE: NG.) announced a Rights Issue to raise around £7bn, and the shares plunged.
The price has fallen from about 1,128p to accommodate the roughly 29% increased share count caused by the event.
As I write (18 June), the share price is about 885p, so that’s a drop of almost 22% — painful for existing shareholders, no doubt. That’s especially true if they were not inclined to buy any of the discounted shares offered in the Rights Issue to offset the dilution.
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The power of dividends
But what if I’d bought some National Grid shares two years ago? Would my investment be underwater now, or would the firm’s stream of dividends have helped to save me?
Back in June 2022, I could have picked up a few of the shares at about 946p. So my loss from the stock price would now be 61p for each share held.
However, I’d have qualified for dividends over the period worth 113.96p per share.
That means there has been an overall gain over the past two years worth around 52.96p, or about 5.6%.
Of course, this example ignores the costs when buying shares. But dividends would have saved the investment from losing over all.
I reckon this outcome is a good advert for the potential power of dividend-focused investing with a long-term perspective.
National Grid looked attractive because of its stable trading and regulated monopoly positions in the energy network of the UK and parts of the US.
However, the business has always needed vast sums of money to be reinvested into energy networks to develop and maintain them. That situation helps to explain the high level of debt on the company’s balance sheet.
Diversification can be key
Many articles have been written about National Grid over the years. One of the risks often underlined was that the company might one day need to step up its investment activities, or be required to do so by regulators.
Well, it looks like that risk has bitten shareholders now. The shares have been diluted and the dividend has been rebased lower.
It’s possible a similar capital-raising event may happen again in the future, so the risk is ongoing. Nevertheless, I see the stock as worth consideration for a dividend-focused and diversified portfolio now.
However, I’d consider shares in other sectors too.
For example, financial services provider Legal & General has a decent multi-year dividend record and a high yield. I’m also keen on Supermarket Income REIT in the property sector, and Mony Group, which owns the Moneysupermarket.com brand.
Dividend investing can be a decent strategy. However, National Grid has demonstrated that it’s wise not to put all our eggs in just one basket. Diversification between different stocks in different sectors can be key to successful outcomes.
