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.
The post Is National Grid the best dividend stock to buy in the FTSE 100? appeared first on The Motley Fool UK.
Should you buy National Grid now?
Don’t make any big decisions yet.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.
And he believes they could bring spectacular returns over the next decade.
Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows…
When such enormous changes hit a big industry, informed investors can potentially get rich.
So, with his new report, Mark’s aiming to put more investors in this enviable position.
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
£12,000 in savings? I’d buy these 3 FTSE shares to target passive income
These superb FTSE 100 dividend yields could help create generational wealth
Here’s how I’d try to get rich, with just £200 a month in a Stocks and Shares ISA
6.11% yield and a P/E of 11! Has the National Grid share price ever looked better value?
3 shares I’m avoiding like the plague in today’s stock market
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.
