Compounding

The Motley Fool

If I invest £10,000 in National Grid shares, how much passive income would I receive?

The London Stock Exchange contains dozens of high-yield dividend shares. These are stocks that pay above the 4% average yield. All have the potential to generate reliable passive income for my portfolio.

One of the most popular FTSE 100 dividend stocks is National Grid (LSE: NG). Its regulated monopoly status has helped it pay rising income for nearly 30 years.

The stock is part of my own portfolio. And it’s one of only a handful of income shares in which I feel comfortable reinvesting the dividends. In other words, buying more shares with the payouts I get, which fuels compound returns.

But what if I had £10,000 to invest in the stock right now and wanted passive income? How much could I expect to receive? Let’s find out.
Solid track record
Today, the National Grid share price is 1,023p (or £10.23 per share). That’s nearly 30% higher than it was five years ago, which means it has comfortably outperformed the wider FTSE 100 index.

The company even kept the dividends flowing to shareholders during the pandemic.

In November, it reported a first-half underlying operating profit of £1.8bn, which was down 15% year on year but in line with expectations. The full-year results are due in May.

The stock carries a forecast dividend yield of 5.8% for the next 12 months. This means I’d expect to receive passive income of around £580 from a £10,000 investment.

Slow and steady
National Grid manages most of the UK’s flow of electricity and gas, thereby ensuring a reliable and secure supply of energy to homes and businesses.

It makes money primarily through charging fees to electricity generators, distributors, and large industrial consumers for using this transmission infrastructure. But it is restricted by regulations in how much it can charge customers.

Therefore, as we saw in the table above, the annual dividend increases are slow and steady rather than high growth. However, the utility giant’s payments are incredibly reliable. This is why I value them in my income portfolio.

I also like that the share price does tend to trend higher over time, unlike some other income stocks, including many banks and telecoms.

Of course, past performance is no guide to the future, but I do prefer to hold stocks that investors haven’t ran a mile from for multiple years.

Energy transition
National Grid is currently investing huge sums — £42bn over the next few years — to decarbonise the network. Part of this has seen it pivot towards electricity by selling off some gas transmission network assets.

But there are still massive multi-year logjams for renewable energy projects to be connected to the grid. This is threatening the government’s plan to run the grid entirely on clean electricity by 2035.

Meanwhile, the firm already has net debt of £44bn. This is manageable for now, but if capital expenditure keeps going up, this could become a risk to the dividend.

On balance, though, I value the defensive qualities the share offers my portfolio. No dividend is ever certain to be paid, but I’d be very surprised if this stock missed a beat.