A Closer Look at National Grid's Dividend Potential

Dividend income accounts for around two-thirds of total returns, the actual rate of return that takes into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of National Grid  and assessing whether the company is an appetising pick for income investors.

How does National Grid's dividend history stack up?

FY Dividend Per Share38.49p36.37p39.28p40.85p
DPS Growth8.0%(5.5%)8.0%4.0%
Dividend Cover1.4x1.4x1.3x1.4x

Source: National Grid Company Accounts

National Grid's full-year dividend fell in 2011 owing to an earlier rights issue, but the company has resumed dividend growth since then. Dividend cover falls some way short of the accepted benchmark of two times forward earnings, although the firm's defensive nature -- electricity is one of society's must-need commodities -- helps to guard against earnings pressure.

What are National Grid's dividends expected to do?

FY Dividend Per Share42.1p44p
DPS Growth3.1%4.5%
Dividend Cover1.3x1.3x
Dividend Yield5.1%5.3%

Source: Digital Look

National Grid's full-year results released last week showed pre-tax profits rise 14% to £2.9 billion, helped by a solid performance within its British activities. The firm -- which also operates in the U.S. -- saw return on capital employed in its crucial home market rise to 8.8% last year from 8.6% in 2012.

National Grid also announced a new dividend policy at the time of its results, in which the company said that it aims to build annual shareholder payouts at least in line with RPI (retail price index) inflation for the foreseeable future.

City brokers expect profits to fall this year before moving higher next year, moving in lockstep with fluctuating earnings. Forecasts have set out a 1% earnings per share (EPS) dip for 2014 before a 5% recovery kicks in during 2015. Dividend cover is forecast to remain stable, albeit still under par.

How does National Grid's dividend prospects rate against the competition?

 Prospective Dividend YieldProspective P/E Ratio
Gas, Water & Multi-utilities4.3%18.5
FTSE 1003.1%16

Source: Digital Look

National Grid currently trades on a P/E readout of 15.1 for 2013, cheaper than both its sector counterparts as well as the broader FTSE 100.

Furthermore, the electricity giant's prospective dividend yields far ahead of both of these groups, making it in my opinion a stock worthy of serious consideration for those seeking meaty dividend income.

The firm continues to invest heavily in its asset base, particularly in the U.K. -- total capital investment rose £291 million last year to £3.7 billion -- which I expect to drive long-term profits and underpin steady dividend growth.

In addition, the new eight-year regulatory regime agreed with sector regulator Ofgem helps provide excellent earnings visibility for a considerable time.

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The article A Closer Look at National Grid's Dividend Potential originally appeared on Fool.com.

Motley Fool contributor Royston Wild has no position in any stocks mentioned. The Motley Fool recommends National Grid plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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