The Outstanding Dividend Stock I'm Buying Now

Do you like a fat dividend? What about a growing dividend? And a company with a legalized monopoly that can keep those fat payouts climbing? Then I think you're going to love this outstanding stock, which I've been buying for my own portfolio in the past few months.

OK, I'm not buying it as of this minute, because of the Fool's disclosure rules, but as soon as the Fool's rules permit, I will be scooping up more. That stock is National Grid (NYSE: NGG  ) . There's a lot to like about this regulated utility, and it can make a great investment in times of uncertainty such as we have today.

Another dividend play for a lifetime
Last year I called McDonald's (NYSE: MCD  ) the dividend stock for a lifetime. It has everything you could want in a dividend stock: a redoubtable franchise, an above-average and quickly growing payout, a commitment to distribute all of its free cash flow, and even a pile of hidden assets. But I think National Grid could be an even better dividend play.

National Grid is not your typical utility. It operates power and gas transmission systems in the U.K. and the U.S., with about half of its revenue coming from either. It gets paid when electricity or gas moves through its transmission infrastructure, and doesn't generate power itself (with the exception of a few Long Island power plants). So it operates like a regulated toll road, providing income investors an annuity-like stream of cash year after year. And have I mentioned how big a wad of cash that is? Currently, National Grid sports a yield of 7%.

With such invaluable infrastructure assets, National Grid offers a lot of safety to investors. Its hard assets are indispensable and provide a backstop to the company's valuation. In any type of economic climate, National Grid will be in demand. As a regulated utility, this company can lock in a return on its investment, meaning that its payouts grow over time. Dividend growth and sustainability are exactly what income investors need to be looking for. Management has promised 8% dividend growth for the next two years. I like that kind of visibility.

21 years is a long head start
In detailing his outstanding dividend portfolio, my colleague Jeremy Phillips states, "I believe dividend growth, much more than current yield, is critical to a successful dividend portfolio." He's picked some superstar dividend stocks, but I think a high current and sustainable yield is every bit as important as growth. Let me show you why.

For example, take National Grid with its 7% yield growing at 8% per year, and a stock like Colgate-Palmolive (NYSE: CL  ) paying 2.7% and growing around 13% per year. It will take about 21 years for the low-yielder's payout to catch up with the high-yielder's, despite that high growth rate. To be fair, that doesn't include capital gains, which would likely be better for a Colgate-type stock. Still, if you need current cash flow, you don't want to wait for capital gains, and 21 years is a long head start.

But doesn't this focus on big dividends make me a yield pig? I'd argue no. Consistent demand and reliable returns help ensure that National Grid's dividend is sustainable. As a regulated utility, National Grid earns a guaranteed return on any additional investment. In fact, U.K. regulators allow a higher return than their U.S. counterparts in order to encourage investment. Compare that to stocks in the wireline industry, such as Windstream (NYSE: WIN  ) and Frontier Communications (NYSE: FTR  ) , which are high-yield favorites. Whereas demand in this sector is inexorably ebbing, National Grid is seeing modestly increasing returns.

And National Grid is not a cyclical dividend play such as mortgage REITs Annaly Capital (NYSE: NLY  ) , Chimera Investment, or American Capital Agency, whose gigantic dividend yields (14% and up) depend on a fat interest rate margin. When rates climb, as they ultimately will, these players will have to cut their dividends, and stock prices will come tumbling after. But even these cyclical stocks can play an important role in a well-diversified portfolio. I own Annaly myself. As a dividend investor, you have to be careful to balance a high current yield with growth, and National Grid can offer both.

Where is National Grid's growth?
Last year the company raised billions through a dilutive equity offering, a move that spooked the markets and sent the shares tumbling. The sooner the company can put that newly raised capital to work, the sooner its earnings can improve. The capital will go mostly to bolster U.K. infrastructure, which is decaying so fast that 25% of power systems plants will close during the next 10 years. That focus on the U.K. is good from a return standpoint, since the company has been receiving an effective return on equity of 15%, according to Motley Fool Income Investor advisor James Early. Even better, in the U.K. -- where the company earns 60% of its profit -- its service rates adjust for inflation, so you have a built-in inflation hedge. U.S. electrical infrastructure also is in need of upgrades, and that spells more opportunity.

Foolish bottom line
This low-risk dividend play offers a lot of advantages: some global diversity, the safety of an asset-backed stock, an inflation hedge, and especially that high and growing yield. For Americans owning the stock, the U.K. does not impose a withholding tax, which could be particularly beneficial for those holding National Grid in a tax-advantaged account.

Consider National Grid for your portfolio along with the 13 names from a free report from Motley Fool expert analysts called 13 High-Yielding Stocks to Buy Today. Tens of thousands have requested access to this report and today I invite you to download it at no cost to you. To get instant access to the names of these 13 high yielders, simply click here -- it's free.

Jim Royal, Ph.D., owns shares of National Grid, McDonald's, Frontier, and Annaly. National Grid is a Motley Fool Income Investor choice. The Fool owns shares of Annaly. 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.


Read/Post Comments (41) | Recommend This Article (180)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2011, at 5:16 PM, jimcathy1 wrote:

    NGG doesn't yield 7%. Click on NGG highlighted in blue in your post and you will see the yield is 5.7%. This is a good yield, but if you are posting on a good site (like this one) you should get your facts right.

  • Report this Comment On January 21, 2011, at 5:18 PM, TRILLIBRO wrote:

    Is NGG a foreign owned or US? I Have CEL, which is an Isreali owned company, I love the 10% Div, but the foreign tax is brutal.

  • Report this Comment On January 21, 2011, at 5:23 PM, easyavenue wrote:

    I think if NGG had a dilutive share offering to raise money once, they could very well use the same method again when more $ is needed. Which happens to be right now because of aging US infrastructure. So as soon as they think it appropriate, here comes another dilution.

    I'd like to know why they are not financing improvements with debt? Isn't debt the most shareholder friendly way to address capital concerns? Isn't debt more friendly than dilution?

    Also, you didn't mention their payout percentage. Can we assume it is high since they are not capable of paying for capital improvements outright? Shouldn't a well run utility company be able to pay for its own improvements out of profits?

    I think more investigation is needed before investing in this company.

    EA

  • Report this Comment On January 21, 2011, at 5:35 PM, BioBat wrote:

    According to Yahoo Finance and Marketwatch, the payout is 2.05 per share or 4.8%. Still nice but a far cry from 7%.

  • Report this Comment On January 21, 2011, at 5:50 PM, mikecart1 wrote:

    Wow, the people in here don't know how to calculate dividends?

    To the fools above that diss Jim Royal:

    Trailing Year Dividend Total: 1.024+1.774 = 2.798

    Current Stock Price: 43.75

    Dividend = 100 x (2.798/43.75) = 6.4%

    Jesus!

  • Report this Comment On January 21, 2011, at 6:30 PM, rd80 wrote:

    I owned NGG from sometime in '08 through last summer and was unimpressed. I first heard about it on the Wise Investor radio show and made it a CAPS pick in Feb '08 - it's currently 24 points to the red.

    My pitch for it mentions the company was predicting 8% dividend growth per year back in '08 and it hasn't delivered on that. According to the dividend history on Yahoo, the past three years dividends (two dividends per year) went from $3.00 in '08 to $2.89 in '09 to $2.80 in '10.

    Hope you have better luck with NGG than I did.

    Russ

  • Report this Comment On January 21, 2011, at 6:44 PM, TMFRoyal wrote:

    Wow, spirited debate on this topic.

    Our data provider, Capital IQ, is a great source for this information, and that's the number I've used. Some public sources cite different yields because often they simply double the last dividend of foreign companies, such as National Grid, that pay out only twice per year. But NGG's final dividend, paid out at the start of the year, can be as twice as high as its interim dividend, paid in August. So sometimes on these public sites the yield looks extra high, while other times it looks too low.

    Foolish Best,

    Jim

  • Report this Comment On January 21, 2011, at 7:00 PM, TMFRoyal wrote:

    Hi, easyavenue,

    The FCF payout ratio over the last two trailing twelve month periods is 41% and 56%. On a NI basis, it's 51% and 60% over those two periods. So nothing dire.

    I'm not particularly thrilled with the capital raise via equity either, but I still think there's a good amount of upside left in this utility stock.

    Fool on!

    Jim

  • Report this Comment On January 21, 2011, at 8:55 PM, stuartgordon69 wrote:

    Hi RD80

    Check out http://www.nationalgrid.com/corporate/Investor+Relations/Sha...

    and http://www.nationalgrid.com/corporate/Investor+Relations/Sha...

    I think that you will find that the "reduction" in dividends is due to the fall in the £ and an adjustment for the rights issue. NG is a solid dividend payer in £s with a significant history of growing dividends in £s and good future growth prospects. It is the largest single holding in my income portfolio and has the significant advantage of paying out dividends with no withholding tax

  • Report this Comment On January 21, 2011, at 10:10 PM, Dividendinvestor wrote:

    NGG has a huge amount of debt compared to other utilities; probably not a "best pick" as stated in the Fool article.

  • Report this Comment On January 22, 2011, at 6:13 AM, Fundament wrote:

    NGG is a perfect pick. What I like on that company is that it has engagements in natural gas. Gas could be the future growth driver within the utility sector. The second point I like is the high yield that NGG offers. It is the second highest dividend yield within the industry. Here is a table of the best 12 dividend yielding gas utilities:

    http://long-term-investments.blogspot.com/2011/01/12-gas-uti...

  • Report this Comment On January 22, 2011, at 9:53 AM, mureno wrote:

    STOXX Americas Dividend Select 40 highest dividend yielding stocks:

    http://goo.gl/4KhKe

  • Report this Comment On January 22, 2011, at 12:07 PM, wrenchbender57 wrote:

    Hmmmmm....NGG shows earnings of $12.22 per share in 2008. Then 66 cents in 2009, NA in 2010 and projected $3.76 per share in 2011.

    What is the deal with that? What happened in 2009 to drive the dividend to almost nothing compared to 2008? This is not a trend that I like to see in a company I would buy stock in. Can anyone explain? These stats are from the TDA site.

  • Report this Comment On January 22, 2011, at 1:49 PM, Merton123 wrote:

    The American Investor can buy the ADR of NGG which is traded on NYSE. The prior postings do a good job fleshing out the pros and cons of this ADR.

  • Report this Comment On January 22, 2011, at 4:10 PM, ajaykc wrote:

    Simply put, if you are a trader then don't buy NGG but if you want stable income without worry then you can simply put your money in this stock and even forget about it. After 10 years you will realize that Apple bubble have burst and this company is still paying same dividend and still doing good business and your money is in green with dividend income. Its not banking sector either such as Bank of America/Citi/Lehman Bros which usually act reckless.

  • Report this Comment On January 24, 2011, at 5:30 AM, evidenceguy wrote:

    Payout ratio at 64% is pretty high; should be concerning if main attraction is the dividend. Also very high long-term debt (300% of equity), even for a regulated utility.

  • Report this Comment On January 24, 2011, at 12:31 PM, stan8331 wrote:

    A payout ratio in the 60's is OK - you're not going to get a high yield from a very small payout ratio unless something fishy is going on. The debt is a legitimate source of concern, although it's not likely to present a serious problem for the company unless we fall back into an extended recession. Even then the income stream should be relatively stable, but servicing the heavy debt load could become problematic if economic conditions get bad enough.

    Whether NGG represents a great investment depends on how high a margin of safety you need. It could fit into most any portfolio - I wouldn't make it the linchpin of a portfolio that first and foremost needs to protect current assets, but barring economic disaster it should be relatively safe.

  • Report this Comment On January 24, 2011, at 1:26 PM, Borbality wrote:

    seems a little risky to be "for a lifetime"!!

  • Report this Comment On January 26, 2011, at 2:15 PM, gimponthego wrote:

    If you're kicked back at Rancho Relaxo as, we are in San Antonio (60 degrees and cobalt blue skies) in the dead of winter)...NGG rides tall in our portfolio saddle. Retired early and have several years left to trade within my IRA, which I've been doing for 12 years. Starting with a finite amount of funds, knowing you can not add to that number gives one tremendous satisfaction when you see it grow.

    If you're close to retirement or have already hung up the spurs, I suggest you add NGG to your portfolio.

  • Report this Comment On January 26, 2011, at 7:04 PM, 1caflash wrote:

    I have CEL and EXC shares. Make sure CEL shares are NOT in a Tax-Deferred Account. Put Cel in a DRIP, and gradually Buy shares on Dips. [Very Little Poetry]. Exelon announced Another Consistent Distribution and The Company's Bonds and those of its Subsidiaries are currently Rated Well. Remember, You Buy Utilities for Stability in Your Accounts. When They Do Fine, then You Have Added Bonuses.

  • Report this Comment On January 27, 2011, at 3:44 PM, DESERTKAT42 wrote:

    Once again the fools are touting the expensive stocks. Maybe they say buy because they intend to sell...? They have become influential enough to be able to affect the market on certain stocks. so I still say buy the cheaper ones, you risk less and in the end reap more. Three fast nickles beat a slow dime - every time!! about the earlier discusion of NGG a foreign stock. You MUST always take the tax you pay OFF the dividend your get, it reduces your payment and in most cases you can never recover it from the country you pay it to. plus you have to add the cost of the trade (I use both the buy and the sell fee) to the cost of the stock which affects the net percentage. example NGG traded for 40.00 a share; buying 100 shares with a fee of 7.00 plus an assumed fee of 7.00 to sell increases the stock price to 40.14. it pays a dividend of 2.04 annually. the foreign tax is (I don't know the foreign tax rate of GB so I'll use Canada's 15%) 2.04 less the 15% tax leaves a net divided of 1.73 that you will receive(note: the foreign tax is deductable on your U.S. return). using the above formula as given from mikecart1 dividend = 100 X (1.73/40.14) = 4.3% half of what they claim the dividends really are. Do ALL the math people, not just the part that makes it look good.

  • Report this Comment On January 27, 2011, at 3:51 PM, dargus wrote:

    Britain does not charge foreign taxes on dividends and you will pay fees no matter what stock you buy.

  • Report this Comment On January 28, 2011, at 1:05 PM, BioBat wrote:

    mikecart1,

    We know how to calculate dividends but what you're reporting as dividend payouts isn't the same as what's reported elsewhere.

    Yahoo and Marketwatch both have NGG paying out $2.05 per share. At today's price of ~$44, that's under 5%. Still a nice dividend but no where near 7%.

    So there's one of two possibilities

    1. The data reported on Marketwatch and Yahoo are wrong (they could be)

    2. The data reported on Marketwatch and Yahoo are correct and the dividend is 4.6-4.7%.

  • Report this Comment On January 28, 2011, at 1:47 PM, BigOlDave wrote:

    S&P calculates fair value at $39 and a DCF 12-mo target at $41, concluding the stock is a "Sell".

  • Report this Comment On January 28, 2011, at 2:19 PM, DESERTKAT42 wrote:

    Thanks Darqus for the info on GB taxes. It'll help with my calcs on their stocks. Yes you pay fees for all purchases and sales and thus it is a part of the cost and must be included in the bottom line, which is why it was part of the example. I include that in all my speculations and income research, not just this particular stock.

  • Report this Comment On January 28, 2011, at 3:11 PM, hcchurch wrote:

    Any one have PPT @ 9.70 div. >.59 a share

    paying monthly. $ 6.45 share.

    Avg. 6.00 a share for last 10 yrs.

  • Report this Comment On January 28, 2011, at 3:40 PM, BarrySta wrote:

    There was a third -- "special" -- dividend paid last June, of $4.25. What was that? Apart from that, the previous dividends over the last 3 years of 1.02, 1.77, 1.15, 1.74,.95, and 2.05, along with a falling stock price over that period of 43.6% does not indicate that at any time during this period was the dividend anywhere near the reported 7%. And as previously reported, the current yield, based on the most recent dividend, is 4.64%, along with a more recent price trend (last 3 months) of a negative 7.25%. What am I missing here?

  • Report this Comment On January 28, 2011, at 4:07 PM, BarrySta wrote:

    And, can you point me to something that shows the the yield growing at 8%? Has grown at 8%? Is growing at 8%?

  • Report this Comment On January 28, 2011, at 4:47 PM, ensign7 wrote:

    To me, the dividend today is 4.65% with other stocks payimg 5-6% with out the foreign tax

    Cant understand where NGG is attractive????

  • Report this Comment On January 28, 2011, at 5:36 PM, sshobe wrote:

    This UK company pays an annual dividend of $2.05; with a current price of $44 (which is about a $5 drop per share over the past 12 months), the yield is aorund 4.65%

    Can't see buying a stock that can't hold its value.

  • Report this Comment On January 28, 2011, at 6:30 PM, BarrySta wrote:

    @hcchurch Re: PPT

    So why does a fund with close to a 10% distribution yield have a declining price?

  • Report this Comment On January 29, 2011, at 8:22 AM, birder1500 wrote:

    Re: PPT

    This is not a fund for the faint hearted. It invests about half its assets in junk bonds. 24% rated CCC. Real junk.

  • Report this Comment On January 30, 2011, at 10:31 AM, marco55 wrote:
  • Report this Comment On January 31, 2011, at 11:03 AM, shbeavers wrote:

    This example shows how important it is to check data sources as well as to write accurately. The 8% growth rate can't be for dividends (so maybe ROE? - not clear) and the dividend yield is definitely not 7%.

    Check the dividend history on Yahoo, which lists the 1st dividend payment by NGG as being on 11/30/05. Using the single dividend payout from each date, the dividend CAGR for NGG is 3.03% for the 5 years from 11/30/05 to 12/1/10 and it's 16.6% for the 4.5 years from 11/20/05 to 6/2/05. If you use the full years' dividends for 2006 and 2010 (because only 1/2 year available for 2005) you get a 4-year CAGR of 5.11%

    Yahoo's summary shows 2010 dividends as $2.05 but it's historical dividends listing shows dividends at $2.798. So the dividend yield is around 5.7% depending on the day you price NGG.

    Glibly throwing numbers around with no support for their validity is a disservice to readers. I think a correction and/or clarification from MF is in order, as well as a better editorial review process.

  • Report this Comment On January 31, 2011, at 5:22 PM, plankton97 wrote:

    From NGG's "Interim Management Statement

    for the period 1 April 2010 to 25 July 2010":

    Steve Holliday, Chief Executive, said:

    “We are well positioned to deliver another year of good performance, which will underpin our targeted 8% dividend growth policy to 2012..."

    As has been explained above, they pay divs biannually in differing amounts (which is why Yahoo et al. don't calc it correctly...). If you calc the yield yourself, it was about 6.5% on Jan. 20.

    If you trust that their divvy *will* grow by their targeted 8%, that would mean that your forthcoming yield (as of Jan. 20) would be 6.5 * 1.08 = 6.95% (subject to exchange rate).

    For the sake of completeness, it's actually slightly more complicated than described above, as we are midway through their fiscal year. We can calculate what their next payout must be (in order to bring this year's annual payout to 108% of last year's), but we don't know what the payout following that will be.

  • Report this Comment On January 31, 2011, at 5:30 PM, plankton97 wrote:

    @ensign7,

    As darqus pointed out above, the UK does not withhold foreign taxes on ADRs.

    And go read mikecart1's post on how to calc the dividend correctly - the yield is much higher than the 4.65% you claim.

    NGG still might not be the right stock for you, but at least get the numbers right before you make that decision.

  • Report this Comment On February 01, 2011, at 11:46 PM, BarryWel wrote:

    National Grid's dividend for 2010 was $2.9217/share per their website.

  • Report this Comment On February 04, 2011, at 11:43 AM, mjtri wrote:

    I worked with National Grid a couple of years ago in New York. I don't want to get into all the specifics, but it didn't seem like they had their act together.

  • Report this Comment On February 06, 2011, at 11:35 AM, deltafox2 wrote:

    @mitri

    this description fits 100% of all industrial outfits once they expand beyond a certain size if seen from the inside. To me it's surprising that seemingly chaotic organisations manage to provide their customers with reasonable service and their shareholders with a reasonable ROI and thus survive over the decades.

  • Report this Comment On February 11, 2011, at 3:19 PM, bichinboomer wrote:

    I have worked for two major pharma companies and experienced the exact same as deltafox2. A commom refrain was that "we make money in spite of ourselves". After a certain size is reached, managing it just becomes too unwieldy, to say nothing of the infighting time wasted.

  • Report this Comment On February 15, 2011, at 10:36 PM, pmjzzz wrote:

    To evaluate the dividend yield of an ADR based on a foreign stock you need to eliminate the effects of historic exchange rate movements. You'd probably also like to eliminate the effects of future movements - but that's kind of hard to do!

    Because the dividend is declared on the UK shares in £, then converted into $ at the rate on the date of payment (and factored by the ADR ratio) - you need to look at the last 12 months of dividends in £ vs the current price in £.

    Dividends in 2010 were £0.2484 in June, and £0.129 in December. That's £0.3774 on a stock price of say £5.65 (mid Feb 2011) = 6.68%. So if you buy the ADR today, at whatever the current price is in $, you'd get 6.68% if future dividends do not change and if the exchange rate stays constant for the remainder of 2011. Of course it won't - so your actual dividend in $, or as a percentage of your purchase price, will go up or down depending on exchange rate movements.

    The 8% annual increase was stated in

    http://www.nationalgrid.com/annualreports/2010/business-over....

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