I’ve long been a fan of power provider National Grid (LSE: NG) for the passive income it throws off. But is it actually the best FTSE 100 dividend stock to buy?
Let’s take a closer look.
Market-beating yield
The first thing to grab me when assessing this company’s credentials is the size of the dividend yield.
As I type, this sits at 5%. That’s quite a bit higher than the 3.6% or so I’d get from owning a fund that simply tracks the return of the index.
So far, so good.
Other things I like
Aside from that more-than-reasonable yield, it’s worth noting that National Grid has a decent record when it comes to hiking dividends. This tends to be indicative of a company whose earnings are relatively predictable.
Since we all need gas and electricity, this isn’t a complete surprise. And since power demand is only likely to increase going forward, there’s surely a good chance of this trend continuing (but more on this in a bit).
Another thing worth pointing out is that analysts expect this year’s dividend will be covered 1.5 times by expected profit. Although no dividend stream can be guaranteed, this is sufficiently large to make me think that it’s likely to be paid.
On the downside…
There are a few ‘drawbacks’ for me to be aware of.
First, there are certainly at least a few stocks from the FTSE 100 that yield more. Insurance giants Aviva and Legal & General, for example, offer yields of 7.1% and 9.3%, respectively. Fellow top-tier titan British American Tobacco comes in at 9.2%.
Of course, it’s still important to check that profits will be sufficient to cover these payouts. But this shows it’s theoretically possible to generate a far higher amount of passive income elsewhere.
Second, National Grid has a truckload of debt on its books. That’s not surprising given how much it costs to maintain its infrastructure. But it does help to explain the company recently tapping investors for £7bn to speed its transition to renewable energy sources.
The move came as a shock to the market. It was compounded by the company announcing it would decrease its dividend from 53.1p per share to 45.3p. I said earlier that its record of increasing dividends was decent. I didn’t say it was perfect.
Understandably, the shares tanked on the day of the announcement.
Looking expensive
On a positive note, the price has shown signs of recovering in recent weeks. At least part of this is probably due to the company reassuring shareholders that it intends to return to growing dividend payments by inflation in the future.
The shares change hands for 14 times forecast earnings. That’s average relative to other stocks in the FTSE 100. Nevertheless, it’s pricey compared to other UK utility shares.
My verdict
Ultimately, finding a dividend stock that ticks every box is unlikely. All investment involves risk.
As long as my money is spread around the market and I’m not over-invested in one particular sector, I should be able to mitigate any damage from one or two encountering problems.
It may not be the very best stock out there but if I aimed to build an income-focused portfolio, and had spare cash to invest, National Grid would be high on my buy list.
This post was originally published on Motley Fool
