Last year, National Grid (LSE: NG) shares paid a total dividend of 58.52p. On the current share price of £9.84, this gives a yield of 5.9%. By comparison, the FTSE 100’s average yield’s currently 3.7% and the FTSE 250’s is 3.3%.
I started with £9,000 when I began investing in shares 35 years ago. If I invested that sum now in National Grid stock, this year I’d make £531 in passive income. This is money earned with very little daily effort, such as with dividend payouts from shares.
If the rate averaged the same, then this would rise to £5,310 after 10 years, and to £18,585 after 35 years.
Of course, yields will go up and down during these periods, depending on changes in share price and annual dividend payments.
Turbocharging the income
This is a much better return than could be made in a standard bank savings account. But it could be a lot more if the dividends paid out were used to buy more National Grid shares – known as dividend compounding. It works on the same principle as leaving interest in a bank account to grow.
Doing this on the same 5.9% average yield would make an additional £7,212 after 10 years rather than £5,310. After 35 years, an extra £61,610 would have been made, not £18,585!
The total investment in National Grid would be £70,610, which would pay me £4,166 a year in dividend income.
Starting from £0 in the bank
Contrary to popular belief, I think investing in shares doesn’t require a sizeable sum to begin with. Just foregoing an extra beer or coffee in the day and investing that money in stocks can generate big returns over time.
For example, £5 a day (£150 a month) invested in 5.9%-yielding National Grid shares and then compounded would grow into £24,569 after 10 years. This would pay £1,450 a year in dividend income.
On the same basis, the total investment pot would be £209,873 after 35 years. By that time, it would be generating annual dividend payments of £12,383!
Does the business look strong?
Growth in earnings drives a company’s dividend payout and share price higher over time. Consensus analysts’ expectations are that National Grid’s earnings will increase 11.6% a year to the end of 2026.
Earnings per share are forecast to rise 7.3% each year to that point. And return on equity is projected to be 9.5% by then.
A key risk for the owner-operator of the electricity transmission system in England and Wales is the high costs of maintaining the grid. It is also obliged to invest in the transition to greener energy.
Despite this, its 2023/24 full-year results showed a 4% underlying increase in operating profit over the previous year – to £4.773bn.
Will I buy the shares?
I have several shares that are geared to provide me with high passive income, and I’m happy with those. But if one of them consistently underperforms, I may well substitute it with National Grid, depending on how it looks at that point.
I like the firm for its good yield and because it’s a vital part of the UK’s infrastructure.
This post was originally published on Motley Fool
