Income investors regularly look towards utility stocks for their core portfolios, thanks to their high yielding and dependable dividends. National Grid (LSE: NG) (NYSE: NGG.US) is an obvious choice, but are there any compelling reasons to choose it instead of peers such as Centrica, SSE or United Utilities?
In my view, the answer is yes — I believe that National Grid has a number of unique attributes that make it a top choice for income.
A big monopoly
First up is National Grid’s size — its market cap of £28bn is nearly 50% more than Centrica’s £20bn market cap, and is nearly six times that of United Utilities. While size isn’t a goal in itself, National Grid’s size does offer some potential benefits for income investors.
Firstly, the wave of takeovers and consolidation we’ve seen with smaller utilities is unlikely to affect National Grid.
Secondly, larger companies are usually able to borrow on more favourable terms, which could provide a longer-term benefit when interest rates eventually rise.
Finally, investors and regulators might well object to foreign ownership of National Grid, since it’s responsible for the vast majority of the UK’s gas and electricity transmission networks, without which the country couldn’t function for more than a few hours.
Global diversity
In addition to being a near-monopoly business in the UK, National Grid also has a substantial US regulated business, which accounted for more than a third of its £3.6bn operating profit last year.
Although the regulatory system in the US is slightly different to that in the UK, the underlying benefits for investors of consistent, predictable income still apply. What’s unique to National Grid is that it offers the benefits of a substantial regulated business in two continents, which introduces a level of resilience to the firm’s earnings that’s not offered by its UK-focused peers.
What about the dividend?
Finally, I’d like to take a closer look at National Grid’s 5.5% dividend.
In March, following the approval of new multi-year regulatory deals in both the UK and the US, National Grid confirmed a new dividend policy based on dividend increases above RPI inflation “for the foreseeable future”.
This is the closest thing possible to a guarantee that National Grid’s dividend will provide an income that broadly keeps pace with the real-world cost of living — a promise it can only make because its regulated earnings are themselves linked to RPI inflation.