Thanks to the latest Budget, from 1 July we’ll be able to stash away up to £15,000 in an ISA — and we can split it any way we please between shares and cash.
Of course, Fools know that shares beat cash hands down over the long run, but it’s nice not to have to worry about being in cash when choosing which shares to buy.
And on that question, National Grid (LSE: NG) (NYSE: NGG.US) looks like a pretty strong candidate to me.
A solid business
The company, in the business of electricity and gas distribution in the UK and in the USA, pays one of the best and most reliable dividends in the market and has been doing so for years — and what’s more, it should carry on doing so for decades to come.
Here’s what last year’s results together with forecasts for the next three years look like:
| Mar | EPS | Change | P/E | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2013 | 56.1p | +12% | 13.6 | 40.9p | +4.0% | 5.3% | 1.4x |
| 2014* | 52.1p | -7% | 15.9 | 42.4p | +3.7% | 5.1% | 1.2x |
| 2015* | 54.9p | +5% | 15.1 | 43.8p | +3.3% | 5.3% | 1.3x |
| 2016* | 56.9p | +5% | 14.6 | 44.7p | +2.1% | 5.4% | 1.3x |
* forecast
Strong dividend policy
A first-half dividend of 14.49p per share for the six months to 30 September 2013 has already been paid, and at the time the firm reiterated the dividend policy announced last March — the intention is to lift it at least in line with RPI inflation each year.
And chief executive Steve Holliday stressed the importance of dividends, saying “Overall, we again look set to invest well over £3bn, grow our asset base and deliver another year of good operating performance. Taken together, this supports our commitment to sustainable dividend growth“.
With that in mind, how much might an ISA investment in National Grid be worth in 20 years time?
Let’s be conservative and assume the dividend grows at around the current rate of inflation of approximately 2%, and that the share price only appreciates at the same rate — and never mind those forecasts that suggest we’ll see better than that.
A four-bagger!
If we go with a dividend yield of 5.1% and a 2% share price rise per year, with dividends reinvested a sum of £1,000 invested in National Grid shares now would result in a sum of almost £4,000 — a quadrupling of our cash. And that’s on an estimate that’s probably too conservative
The same £1,000 in a cash ISA at typical current rates would net us just £1,300 over the same period — allocating the allowance between shares and cash shouldn’t be too difficult a decision!