National Grid’s 4.83% dividend yield is looking tempting

National Grid dividend yield

I last covered National Grid (LON: NG) (NG.L) three months ago, when the shares were trading at around the 930p mark. At the time, National Grid had a trailing dividend yield of 4.76%.

Since then, shares in the utility giant rallied higher for a brief period, trading above 980p in early September, however, in the last month or so, they have fallen back down again to now trade at 916p.

4.83% dividend yield

At that share price, National Grid’s trailing dividend yield of 4.83% does look quite tempting. The company has stated that it plans to increase its dividend in line with RPI inflation for the foreseeable future. That means investors that can probably expect dividend growth this year of between 3%-4%. While that level of growth is not prolific, it’s no doubt a higher level of growth than many other FTSE 100 high dividend stocks such as Royal Dutch Shell and GlaxoSmithKline are offering right now.

Furthermore, dividend coverage, while not high, is also better than many other FTSE 100 high dividend stocks. With City analysts forecasting earnings per share of 60.8p for FY2018, dividend coverage should be approximately 1.30 times.

Is National Grid a good dividend stock?

There’s several things I like about National Grid as a dividend stock. The company has a strong record of consistent dividend increases, even if those increases have not always been sizeable. After falling to 916p, the shares currently trade on a forward looking P/E ratio of 15.1, considerably lower than the ratio of 18.2 they were trading at in late May. Furthermore, with global markets having enjoyed a strong run in recent years, National Grid’s defensive nature could provide protection in the event of a market correction.

On the bear side, growth is expected to be sluggish in the near term, with analysts forecasting revenue growth of just 1.8% this year. There’s also a fair chunk of debt on the balance sheet at present (to be expected for a utility company). National Grid had total long-term debt of £23.1bn at the end of FY2017, a high figure relative the company’s market cap of £31.7bn. That adds an element of risk to the investment case, especially with talk of higher interest rates.

With these points in mind, I’m going to hold off on buying National Grid for the dividend right now. Having said that, if the share price continues to fall lower and the dividend yield rises higher, I will reassess the investment case.

Disclosure: Edward Sheldon, CFA owns shares in Royal Dutch Shell and GlaxoSmithKline. 

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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