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 (LSE: NG) (NYSE: NGG.US) and assessing whether the company is an appetising pick for income investors.
How doesNational Grid's dividend history stack up?
|FY Dividend Per Share||38.49p||36.37p||39.28p||40.85p|
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 2 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 areNational Grid's dividends expected to do?
|FY Dividend Per Share||42.1p||44p|
Source: Digital Look
National Grid's full-year results released last week showed pre-tax profits rise 14% to £2.9bn, helped by a solid performance within its British activities. The firm -- which also operates in the US -- 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 doesNational Grid's dividend prospects rate against the competition?
|Prospective Dividend Yield||Prospective P/E Ratio|
|Gas, Water & Multi-utilities||4.3%||18.5|
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 UK -- total capital investment rose £291m last year to £3.7bn -- 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.
The inside track to growth elsewhere
If you already hold shares in National Grid and are looking to significantly boost your investment returns elsewhere, check out this special Fool report, which outlines the steps you might wish to take if you are hoping to become seriously rich from other shares.
Our "Ten Steps To Making A Million In The Market" report highlights how fast-growth small-caps and beaten-down bargains are all fertile candidates to produce ten-fold returns. Click here NOW to enjoy this exclusive 'wealth report' -- it's 100% free and comes with no obligation.