I was talking to a young investor recently, thinking about his first Stocks & Shares ISA purchase. I asked what he had in mind, half expecting to hear of some high-flying growth stock. He told me he fancies National Grid (LSE: NG). And it was nothing to do with thinking the National Grid share price is going to soar, or anything like that.
No, he had his eye on the dividends, excited about how much he might accumulate over 40 years. It was great to see such wisdom in one so youthful. But it did make me suck my teeth and wonder why I’d never got round to buying National Grid myself.
I’ve always seen it as one of the best FTSE 100 shares for long-term investors. But I’ve never actually gone for it. Usually what happens is something else tops my list when it’s time to buy, pushing National Grid down into second or third place. And it’s never quite made it to the top.
On top of the dividends, the National Grid share price hasn’t performed too shabbily. So far in 2021, it’s up 12%, a couple of percent ahead of the FTSE 100. It held up well as a defensive stock through the pandemic downturn too, managing 13% over the past two years. The Footsie, over the same period, has barely made it back to where it started. Some periods, it hasn’t done too well, but over the decades National Grid shares have comfortably kept ahead.
Back to the dividends
We’re looking at dividend yields in excess of 5%, and they’ve been steadily progressive for years. When so many firms had to cut back on their payments last year, the beauty of National Grid’s business model became even more apparent. Operating the UK’s energy distribution network means the company’s outlook is one of the clearest on the whole UK stock market. Every year, there’s a very good view of likely distribution volumes, revenues, and expenditure.
But it can’t all be good, can it? Well, no, there are certainly risks. The main one for me is that National Grid operates in a highly regulated market. I really don’t like it when governments get to dictate what a company can and can’t do with its shareholders’ money.
National Grid share price pressure?
We saw it with the banking sector last year, when dividends were withheld at the behest of the PRA. I know there was good reason, but I still didn’t like the interference. Still, where there’s a monopoly situation, regulation is something of a necessary evil. But I wonder if we might see extra pressure on companies in the utilities sector in the next few years. And might that put the dampers on the National Grid share price and its dividend?
My concern stems from our uncertain economic outlook. If people are suffering, energy bills could become high profile. And the temptation to cap National Grid profits, along with the providers themselves, might prove irresistible.
So yes, there’s potential downside. But I still see the dividend outlook at National Grid as compensating for them, and then some. Maybe I will finally get round to buying National Grid shares this year.