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Resource business National Grid (LSE:NG.) has long been a target for investors looking for reliable and high-paying dividends. Like other stocks in its sector, the FTSE 100 The company's defensive operations and stable cash flow have made it a passive income generator.
However, the business has shocked the market recently by announcing a reduction in dividend payout ratio for the current financial year (until March 2025). Unsurprisingly this caused its share price to fall as income investors piled in.
In better news, City analysts think that prize money will start to rise again after this reset. Their predictions are shown in the following table:
| A year | Dividends per share | Dividend movement | Return yield |
|---|---|---|---|
| 2025 | 45.30p | -23% | 4.5% |
| 2026 | 49.55 p | +9% | 5% |
| 2027 | 50.60 p | +2% | 5.1% |
As a result, the dividend yield on National Grid shares – already above the FTSE 100 average of 3.5% – eventually fell to more than 5%.
However, returns are not guaranteed, and broker ratings can often miss their mark. Indeed, few expected the power grid operator to cut payments significantly this year.
So how accurate are National Grid's dividend forecasts? And should I buy stocks for my portfolio?
Debt problems
First, let's untick a simple task: checking the National Grid's profit coverage.
Over the next three years, the projected payouts cover between 1.5 and 1.6 times projected profits. As an investor, I want to cover 2 times and more with a margin of error.
That said, coverage of utility stocks is not as important for dividend chasers as it is for cyclical stocks. This is because revenue and cash flow are predictable for companies like this.
In the case of National Grid, I am more interested in the balance sheet situation. A company that is solvent, or that can manage its debt payments, is in a much stronger position to pay sustainable and growing dividends.
Unfortunately, at this point the National Grid still worries me. Keeping Britain's lights on is an expensive business, and so are the company's plans to expand its asset base.
As a result, total debt rose by more than £2.5bn in the last financial year, to £43.6bn. And City traders expect it to increase significantly in the next three years. They predict it will top £53.9bn in finance by 2027.
You are green
National Grid has cut dividends this year following its decision to launch a £6.8bn rights issue. The money will be part of a £60bn investment over the next five years to boost the UK's energy grid.
Investing in the green economy can be very profitable for National Grid investors. It will see the business grow its asset base by around 10% each year, which could increase the share price and result in bigger and growing profits.
However, investors should also be aware of its potential impact on earnings in the near term. The company's large debts give it less financial flexibility. And I wouldn't rule out another placement of shares to fund its ambitious growth plans.
I would consider buying National Grid shares following this year's price drop. I think they can show a good way to benefit from the growth of the green economy. But I will also brace myself for a potential dividend disappointment in the near term.
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