National Grid (LSE: NG.) shares are big favourites among investors who want steady cash.
But the 2023 dividend yield is only around 5.4%, and we have FTSE 100 stocks on twice that. So why are the shares so popular? I think one reason shows in the share price.
Steady share price
National Grid shares weren’t hurt too badly by the pandemic crash. And they’ve soundly beaten the FTSE 100 over five years.
I’d say that’s mostly because investors see this as a safe stock, and that can mean steady income. The company has a monopoly on the energy distribution business in the UK, and we just can’t do without energy.
There might be a future down side to that, though. When confidence returns to the UK stock market, there may not be such a focus on safety. And we could see safe stocks fall back a bit.
Long term
But that’s fine by me, because I buy dividend shares to provide passive income for my retirement, not for quick gains or for hedging short-term risk.
What about that yield? It’s not the biggest, but 5.4% could grow into a nice sum thanks to the magic of compounding.
That’s when we plough our cash back into more shares each year. Then we’ll get dividend cash from our original shares, plus a bit more from the new shares. Then that extra dividend goes into even more shares, and so on…
A wonder
Albert Einstein is alleged to have called compounding “the eighth wonder of the world“. But I doubt a genius like him would be that impressed by something so relatively simple.
Anyway, what if an investor puts £1,000 into National Grid shares today, and buys more shares with their dividends each year?
If that 5.4% stays constant, the cash would almost treble in 20 years without adding an extra penny. Add new cash regularly, and a shareholder could end up with a tidy sum.
Bigger yields
Buy why not go for those bigger yields instead? Well, each year’s top yields rarely head the list the next year. So 9% in 2023 might not mean the same in 2024.
Stocks that pay the best long-term cash often tend to be in the second rank of yields, often between 4% and 6%. But if they can do it every year, they could easily end up beating the one-year cash stars.
So would I trust my future income to National Grid shares?
The risks
I’ve owned some in the past, but don’t have any now. The only reason I sold was because I saw something I liked a lot better and didn’t have extra cash to buy any.
And I wouldn’t risk all my money in one stock anyway. National Grid is in a regulated industry, so we don’t know how it might be restricted in the future. It’s also handling the shift away from gas, and that could cost it quite a bit.
But as part of a diversified dividend portfolio? Yes, I expect I’ll buy National Grid shares again before too long.
This post was originally published on Motley Fool
