FTSE 100

Does National Grid’s 5% dividend yield offer income investing appeal?

Even after a share price rise of around 13% since the start of the year, National Grid (LON: NG) currently offers a dividend yield of approximately 5%. That’s almost two percentage points higher than the dividend yield of the FTSE 100 index to which the company belongs.

Furthermore, the firm plans to raise dividends in line with inflation (CPIH) over the period 2022 to 2026. This could mean that its income potential becomes increasingly attractive, since inflation has risen to a ten-year high over recent months and is widely expected to remain above the Bank of England’s 2% target over coming months.

Of course, National Grid’s growth prospects may be more limited than many other FTSE 100 companies. However, its latest half-year results confirmed that it expects to deliver annual earnings per share growth of between 5% and 7% over the next five years on an adjusted basis. This could mean that its forward price-earnings ratio of around 15 offers relatively good value for money compared to other large-cap shares at the present time.

Meanwhile, National Grid’s defensive appeal could become more highly valued over the coming years. Of course, it is impossible to predict when the next bear market will occur. However, history suggests that the current bull run will not continue uninterrupted. And, in times of greater economic uncertainty, companies that offer relatively stable revenue outlooks could be more popular among investors.

National Grid’s share price may also be relatively attractive because of the changes it is seeking to make to its operations. For example, it has completed the acquisition of WPD. This is an electricity distribution network operator that increases National Grid’s exposure to the electricity market at a time when its growth prospects appear to be more encouraging than for gas. In tandem, it is progressing with the sale of its majority stake in National Grid Gas, which further shifts its operations towards electricity.

Clearly, a process of change presents risks. Furthermore, NG shares may prove less popular compared to cyclical stocks should the current bull market persist. And, with significant levels of debt, it may face challenges should a higher interest rate come into existence in the coming years. However, its high yield, dividend growth prospects and strategy shift indicate that it could offer a favourable risk/reward opportunity for the long run.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

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