National Grid (LSE: NG) is one of the most sought-after dividend stocks in the FTSE 100. At the time of writing, shares in the electricity distribution company trade with a dividend yield of 4.6%.
The great thing about this company is that it is relatively defensive. The electricity infrastructure in the UK is a vital backbone of the country’s economy. While National Grid does not control the entire network, it is responsible for the majority of it across Great Britain.
National Grid share price opportunities
This competitive position comes with both benefits and drawbacks.
On the one hand, it means the company has a relatively predictable, guaranteed income stream. I believe the demand for electricity across the UK will almost certainly increase over the next 10 years. National Grid will have a fundamentally important role in ensuring the network is up to standard.
On the other hand, this market is highly regulated and controlled. Regulators can set the amount of money the business and its peers can earn from consumers. This means they cannot just charge whatever they like. There is a strict set of rules regarding the charging structure, and this could impact the company’s profitability if regulators decide to clamp down.
Indeed, it looks as if there is already a risk of this happening. Regulators are planning to reduce the amount of profit utility providers are able to earn over the next couple of years. They are arguing that the cost of developing new equipment has fallen substantially. This should be passed on to consumers in lower prices.
This is the biggest risk facing the National Grid share price today. Additional regulations could hit the company’s bottom line. In turn, the corporation may decide to reduce its distribution to investors.
The income stream
Still, there is more to this business than its UK division. It also has a presence in North America. This market is a bit more flexible and provides a vital income stream for the group. I think this should alleviate some of the pressure on the company’s bottom line if regulators here in the UK decide to clamp down.
So overall, I think the dividend yield on the National Grid share price is safe for the time being. The group’s defensive operations provide a steady, predictable income stream for the company. On top of this, its North American business is growing and delivering additional cash flows for the enterprise to reinvest and return to investors.
While there are some risks on the horizon, I think the company does have a bright future as a defensive income stock. That is why I would buy the shares for my portfolio today. In uncertain times, the National Grid share price looks incredibly appealing as a defensive investment.
The post Should I buy National Grid shares for the dividend? appeared first on The Motley Fool UK.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
