Image source: National Grid plc
As someone who’s always looking to diversify my income streams, dividend shares naturally catch my attention. This is because they allow me to invest in a public company and entrust that its management makes a healthy profit that they can distribute to me.
I believe this is the ultimate and truest form of passive income, as there is very little work (besides research and keeping up-to-date with the company, as an investor, of course) that is required from me.
The opportunity National Grid shares provide
As its share price has declined by over 13% in the last month, I’ve taken a closer look at National Grid (LSE:NG) shares.
There are reasons for the fall which are concerning to me. Firstly, the company’s recent half-year results look disappointing. Gross revenue declined by 10% from £9.4bn to £8.5bn. There is also a similar 11% fall in operating profit from £2.2bn to £2bn. Then, I find the £44.8bn of debt on its balance sheet a not-so-insignificant risk.
However, I don’t think the company is in as perilous situation as its share price drop suggests. It’s still the key electricity supplier for the UK and I expect demand for electricity to continue rising over time.
Furthermore, management has acknowledged its debt problem and are planning to invest £60bn between now and 2029. This is to be used on projects that will improve the company’s economic growth over the long term, which includes plans to decarbonise its energy infrastructure. Ultimately, this should improve supply and lower bills for consumers through efficiency.
This is a bold plan, but it’s likely to pay fruits to its investors, if successful.
How I plan to make a nice second income
The flipside to looking at a 13% share price fall is understanding that the National Grid’s future stream of dividends is now 13% cheaper than before to acquire.
At the time of writing, its shares are trading at £9, yielding 6.5% in dividends.
I understand that dividends aren’t guaranteed. But if I look at the last interim dividend, paid in January, of 19.4p per share and the final dividend declared (which is expected to be paid in July) of 39.12p per share, it should cost me £46,179.08 to generate an extra £250 a month.
That amount is likely to rise over time too as the National Grid has a solid track record of raising its annual dividend. In fact, since the interim dividend that was paid out in 2014, the company has raised both its interim and final dividend every year.
I appreciate the amount needed to invest to make this happen is no measly sum. However, it’s still a cheaper alternative to make a second income than most UK shares. In comparison, the dividend yield for the FTSE 100 as a whole is only 3.6%.
Now what?
With a forward price-to-earnings (P/E) ratio of 12.8, National Grid shares aren’t exactly cheap. But they’re not overly expensive either.
If its projects are successful, then investors could be greatly rewarded, hopefully through dividend hikes.
I believe now could be a good opportunity to build a solid passive income with its shares. Therefore, if I had the spare cash to do so, I’d buy some today.
