While a healthy portion of my portfolio is devoted to growth stocks, I must admit that I'm a big fan of dividend stocks, too. I'm especially attracted to dividend stocks that offer up high yields, though I've certainly learned the hard why a big dividend yield can sometimes be a sign of danger.
However, I think I've found a dividend stock that offers investors a sustainable yield of 5% and moderate growth prospects, all for an attractive price. I am talking about National Grid (NGG -0.03%).
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A strong and stable business
Most investors know that the monopoly-like characteristics of the utility industry make it a low-risk place to put money to work. National Grid is certainly no exception. This company owns nearly all of the electricity and gas transmission lines in the U.K. Millions of consumers rely on these assets every day for an essential service, which makes this business highly predictable. In addition, the company owns a number of transmission assets in several northeastern states, providing the company with geographic diversity and growth prospects.
What's important to know about this business is that National Grid is primarily focused on power transmission, not generation. That means the company is a distribution link between power providers and consumers. National Grid simply collects a fee for its services, acting as a toll booth between the two. Since the demand for gas and electricity remains fairly predictable in all economic conditions, National Grid's business is as rock solid as they come.
Growth is on the horizon
You are likely aware that the U.K. and U.S. are developed markets with relatively low population growth. That means the demand for gas and electricity is stable, but not expected to grow much. As such, any potential revenue and profit growth from these regions are going to come from buying or building new assets, or from price increases.
Thankfully, National Grid's investors recently got some good news on this front. The Massachusetts Department of Public Utilities approved a requested rate hike, which was its first such approval in six years. Management plans on investing $249 million in the area annually at an estimated return on equity of 9.9%. This move is expected to raise the company's revenue by more than $101 million annually.
The company has also submitted a similar request to the New York Public Service Commission. If approved, the company plans to invest $3 billion in the region with an estimated return on equity of 9%. Management estimates that this project could increase its top line by $384 million in 2017.
Beyond rate increases, National Grid is also looking for other ways to generate strong returns and reward shareholders. The company recently announced that it will be selling a portion of its U.K. gas distribution business later this year. A large portion of the proceeds from the transaction will be used to reward shareholders, likely in the form of a special dividend, share repurchases, or both. That's a clear signal to investors that this company is committed to creating value for shareholders.
For a good price
While I believe that National Grid's business is as rock solid as they come, investors have soured on the company's shares as of late. That's likely owed to the combination of big currency movements, Brexit, and concerns over interest rates. When combined, National Grid's stock has fallen more than 18% below its 52-week high. In turn, the company's dividend yield has soared and currently sits well above 5%.
Given then company's incredibly strong business model and modest growth prospects, I can't help but feel that investors who buy in today will enjoy a steadily growing dividend check and slow, but steady, appreciation. That makes National Grid a high yield stock that I want to own this year.
