National Grid (LSE: NG) shares saw a turbulent few weeks ahead of the firm’s rights issue that ended on 12 June.
Having secured £6.39bn for investment, prospects for the owner-operator of England and Wales’ electricity transmission system look positive to me.
By financing this new investment through equity, it has not added to its debt-to-EBITDA ratio of around 7.6. However, this still compares very unfavourably to the ratio of 2 at the top end of what is considered healthy, so remains a risk.
That said, it has interest cover of around 2.8 times, enabling it to comfortably service these debt obligations for the time being. Nonetheless, I would like to see this start to trend lower over the next three years.
Rising earnings would help it to do this, of course. In its H1 2024 results, it maintained its 2020/21 five-year compound annual growth rate (CAGR) of 8%-10% to 2025/26. It also reiterated its earnings per share CAGR target of 6%-8% to that point.
How much passive income can it generate?
For the full-year 2023/24, it paid a dividend of 58.52p a share. On the current stock price of £9.28, this gives a yield of 6.3%, better than the 3.6% FTSE 100 average.
So, £6,000 (less than £20 saved daily for a year) would buy me 646 shares in the company. In the first year, these would make me £378 in dividend payments.
If I removed this money from my investment account, I would make the same amount again the following year. That is provided that the yield stayed the same, although it could go down as well as up, depending on changes in the share price and dividend payouts.
Over 10 years of doing this, I would have an extra £3,780 to add to my initial £6,000 investment. Not bad. But I could do a lot better if I bought more of the shares with the dividends they paid me.
Doing this (‘dividend compounding’) on the same yield would make me an extra £5,247 instead of £3,780.
After 30 years, my shareholding would be worth £39,520 in total. This would pay me £2,490 a year in dividends, or £208 every month!
Making even more from £0 in the bank
It is a common misconception that investing in shares requires a lot of money to start with. This is not true, and significant returns can be made despite having nothing in the bank at the beginning.
Just £5 a day, for example, can create a major stream of income from dividends over time.
After 10 years of putting this amount into National Grid shares with an average 6.3% yield, the investment would be worth £25,117! This would pay £1,582 a year in dividends, or £132 each month.
After 30 years of doing the same, with the same average yield, the investment would be valued at £160,459. This would generate £10,109 a year in dividend payments, or £842 every month!
I have several shares with strong business outlooks that pay me high dividends, and I am happy with those. However, if I did not have them I would buy National Grid for its good yield and solid growth prospects.
This post was originally published on Motley Fool
