National Grid (LSE: NG) is a mainstay of many income investing portfolios. The company has a potent mix of a high dividend yield, stable business model and inflation-beating dividend growth. Over the years, these qualities have become increasingly important to a range of investors who are seeking to generate dependable returns for the long run.
However, it’s not the only income stock which could be worth buying. Reporting on Monday was a company that may not be as stable as the utility stock, but which could deliver strong income returns in the long run.
Improving performance
The company in question is gaming specialist William Hill (LSE: WMH). It released a generally positive trading update for the year to 26 December, which showed it is making progress with its transformation programme. In fact, alongside good momentum in the UK and US markets, this helped to generate an increase in adjusted operating profit for the year of 11%. This shows that while the business has endured a difficult period in recent years, it now seems to be on course to generate rising profitability.
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Of course, there are challenges facing the company too. In Australia, tax changes mean that sales could come under pressure in the coming months. As such, William Hill is conducting a strategic review of its Australian operations. But with the US performing well, its overall international growth potential remains high.
Income potential
With a dividend yield of 4.1%, the company’s income return remains comfortably above inflation. In the near term, there may be a lack of significant growth in dividends ahead. They are expected to rise by around 4.1% per annum over the next two years. While above inflation, there could be a much stronger growth rate in the long run, since the company has a dividend coverage ratio of 1.8. This suggests that growth in shareholder payouts could at least equal profit growth in future years.
Risk/reward
Of course, National Grid remains a lower risk stock than William Hill. The former has a business model which is unlikely to be affected by changes in the performance of the UK or any other economy. While a bear market could take place tomorrow, National Grid’s share price could continue to rise as investors may seek to buy companies which offer dependable returns relative to the rest of the stock market. As such, it remains a better long-term income option than many of its Footsie peers.
Furthermore, with the company having the potential to raise dividends by at least the rate of inflation over the medium term, its 5.6% dividend yield could become even more enticing in future. This could help to protect its investors from the threat of higher inflation. Should the rate of inflation remain stubbornly high as Brexit talks continue, it would be unsurprising for the National Grid share price to respond positively.
