Forget the cash ISA! The National Grid share price and this FTSE 100 dividend stock yield over 6%

Harvey Jones says National Grid plc (LON: NG) and this underrated FTSE 100 (INDEXFTSE: UKX) dividend stock are trading at tempting valuations right now.

| 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.

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.

The average variable-rate cash ISA currently pays just 0.86%, according to Savings Champion. If you’re prepared to lock your money away for five years, you can push that up to 1.95%, which I suppose is something.

On the grid

However, it’s a paltry return with a host of top FTSE 100 stocks currently yielding more than 5% or 6% a year, and thanks to recent stock market turbulence, many are trading at discounted valuations as well.

Pipes and wires transmissions giant National Grid (LSE: NG) is one of the most popular income stocks on the blue-chip index. The £26bn company operates in the traditionally defensive utility sector with interests in both the UK and US.

National treasure

However, that has not prevented it from suffering along with the rest of the FTSE 100, its share price falling 9.5% in the last year to 773p. That may put some people off, but others may see this as a buying opportunity as it now trades at a tempting valuation of just 13.6 times earnings, below the 15 mark traditionally seen as fair value.

There are company specific reasons why its stock has fallen. Just before Christmas, electricity regulator Ofgem proposed price controls for networks in a bid to save consumers £6.5bn, a move that left National Grid “disappointed”. It plans to halve the baseline cost of equity returns to 4%, to help consumers benefit from low interest rates, but this could squeeze National Grid’s ability to pay dividends, the main reason people hold its shares.

Direct action

Payouts could come under pressure after the new system kicks in from 2021. As with every stock, there’s something to worry about. However, the forecast dividend is currently a generous 6.2%, while revenues are expected to grow slowly but steadily, and it remains one of three dividend stocks favoured by Kevin Godbold.

Direct Line Insurance Group (LSE: DLG) is an overlooked FTSE 100 stock also worth highlighting, especially now, as it offers a forecast yield of 8.5%. By the end of next year, that’s forecast to hit 9%. A sky-high yield is often a sign of a company in trouble and its stock has endured a difficult year, dropping almost 14% to 318p in the last 12 months, faster than the FTSE 100 as a whole.

Feeling the cold

Direct Line has retained a loyal own-brand customer base which has partly shielded it from the comparison site melee. But sales have been hit by the loss of major partnerships with Nationwide and Sainsbury’s, and a rise in weather-related claims after last winter’s cold spell.

Revenue growth has also flattened. In 2014, it earned £3.14bn, a figure that’s forecast to be slightly lower five years later at £3.07bn for 2019. However, return on capital employed remains healthy at 21.9%, as are forecast operating margins of 16.9%.

Again, we have a potential buying opportunity here, with the stock trading at just 10.9 times forecast earnings. That dizzying dividend only has cover of 1.1, but doesn’t seem threatened for now. Even if it is trimmed, the yield would still beat anything you are likely to get from a cash ISA.

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.

harveyj has no position in any of the shares mentioned. 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.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

If I’d invested £5,000 in a Nasdaq index fund 5 years ago, here’s how much I’d have now

The Nasdaq index keeps hitting new all-time records in 2024, as US tech stocks fly. How much could I have…

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£500 to invest a month? Consider aiming to turn that into a £20,000 passive income like this!

With a regular monthly investment, it's possible to build a large and steady passive income for retirement. Royston Wild explains.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Investing Articles

As retirement needs soar 60%, here’s how I’m building wealth with UK shares

A regular investment in UK shares and funds could help Brits create a large and lasting pension. Our writer Royston…

Read more »

Investing Articles

I’d buy Games Workshop shares before they reach the FTSE 100!

Games Workshop shares look likely to join the FTSE 100 soon. Here’s why I think investors should consider buying the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Could me buying this stock with a $2.5bn market-cap be like investing in Tesla in 2010?

Archer Aviation (NASDAQ:ACHR) stock's nearly doubled so far in November. Could this start-up be another Tesla in the making?

Read more »

Investing Articles

5,000 shares of this UK dividend stock could net me £1,700 a month in passive income

Our writer calculates the passive income he could earn from holding a significant number of shares in this powerful dividend-paying…

Read more »

Investing Articles

9.3%+ yields! 3 FTSE 100 dividend giants to consider buying

Our writer examines a trio of high-yield FTSE 100 shares and explains some of the opportunities and risks he sees…

Read more »

Investing Articles

As the Kingfisher share price drops on Budget fallout, should I buy?

The Kingfisher share price was on a strong 2024 run until the DIY group warned us of the possible effects…

Read more »