Here’s why I think National Grid shares stand out in their sector as a potentially valuable addition to my dividend portfolio.
I’d buy National Grid (LSE: NG) shares now for my dividend portfolio. Among its assets, the company owns and maintains the high-voltage electricity transmission network in England and Wales.
The network moves electricity for long distances all across the country, from where it’s generated, closer to where it’s needed. And it comprises some 7,000km of overhead lines, 2,800km of underground cable and 350 substations. I’m talking about the tallest pylons we see running across fields, moors and mountains. And the biggest substations packed with transformers and switching gear.
The final destination for transmitted electricity is local distribution networks. And they’re often operated by other companies that deliver the energy at lower voltages to homes and businesses. But National Grid does own some distribution networks in the Midlands, the South West of England and in South Wales.
Yet it’s National Grid’s monopoly position as guardian and operator of the high-voltage network that makes the company stand out in its sector for me. Last year, around 25% of overall operating profit came from the transmission system. Indeed, most electrical energy must pass through the network. Transmission is highly regulated, yes. But it’s consistent and profitable too. And I reckon the set-up will help to support shareholder dividend payments for years to come.
The company also has a big business in the US. It operates gas and electricity distribution networks in New England and New York. And it runs high-voltage electricity transmission networks in those areas.
I reckon National Grid operates crucial parts of the energy systems in the UK and the US. And, as such, the company faces heavy regulatory scrutiny both sides of the pond and must comply with strict compliance standards. And a big part of that is an obligation to invest in and improve its networks and its operations constantly.
That’s one reason the business carries a big burden of debt. But debt and regulatory risks, although they exist, won’t put me off investing in National Grid shares for the dividend. The multi-year financial record shows a steady stream of shareholder payments over many years. And there’s been a modest, low-single-digit percentage increase in most periods. My guess is dividends will likely continue well into the future. But that outcome isn’t certain.
In May, the full-year results report underlined that National Grid has been repositioning its assets to focus even more on electricity. For example, one big deal during the year involved the acquisition of Western Power Distribution, the UK’s largest electricity distributor. And another was the agreed sale of its 60% stake in National Grid Gas.
I think the company’s active portfolio management is aligning the business with the needs of the world today. And I like the idea of investing in a business with such a relevant place in the energy system.
With the share price near 1,171p, the forward-looking yield is just below 4.8% for the trading year to March 2024. And although estimates can prove to be inaccurate, I see that level of yield as attractive.
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 considered so you should consider taking independent financial advice.
Kevin Godbold 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.
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