Is National Grid plc's 6% dividend yield the steal of the century?
National Grid(LSE: NG) shares have endured a torrid run over the last 10 months. Back in mid-May, the FTSE 100 stock was changing hands for around 1,050p. However, since then, it has fallen over 25% to now trade under 800p.
Naturally, the share price decline has pushed the company's yield up. With analysts expecting a dividend payout of 46.3p for FY2018, the prospective yield on offer is now a high 6%.
So, is it time to load up on NG shares for the high yield on offer, or does that high payout signal trouble?
Why the fall?
Before attempting to answer that question, I think it's worth first looking at why the shares have fallen. Right now, there are several forces at play that are impacting the entire utilities sector. There's a great deal of uncertainty associated with the sector, and if there's one thing investors hate, it's uncertainty, but three key issues are the source fo the worries.
1. Threat of renationalisation
One of the main issues affecting the sector is the threat of renationalisation. Jeremy Corbyn, the leader of the Labour Party, has made it abundantly clear that if he gets into power, he intends to take parts of the UK's energy industry back into public ownership.
Understandably, this is causing a great deal of uncertainty among investors. How would Corbyn go about doing this? What price would National Grid shareholders receive for their shares? We simply don't have answers to these questions at the moment, and the lack of clarity is affecting the share price.
2. Regulatory interference
Next up, you have interference from energy regulator Ofgem. An October report commissioned by the government proposed ending NG's current role as operator of the UK's national electricity system. The regulator has also put forward plans for its toughest ever clampdown on energy network profits. Again, this is spooking investors.
3. Rising interest rates
Third, with talk of higher interest rates both here and in the US, we have seen a general rotation out of 'bond-proxy' type dividend stocks over the last six months or so. Many dividend stocks have been sold off, not only in the utilities sector, but across other sectors such as consumer staples and tobacco.
So, with these issues in mind, are National Grid shares worth buying for the high yield?
Personally, I do think the current yield looks tempting. National Grid has an excellent track record of paying consistent dividends, and if you believe analysts' forecasts, it doesn't look like the group will cut its dividend this year or next.
It's worth noting that it now generates over half its revenues from the US. So that part of the business is outside UK regulation. And, according to analysts at Morningstar, the UK part of the business is not trading much above the regulated asset value at present. Morningstar believes that the government would have to pay this value if it renationalised the group, meaning that the downside for investors likely wouldn't be significant.
With so much uncertainty in relation to the sector, I can see the share price volatility persisting for a while. However, for those comfortable with such volatility, picking up the shares now for the 6% yield, could turn out to be a rewarding move.
Our top analysts have highlighted five shares in the FTSE 100 in our special free report "5 Shares To Retire On". To find out the names of the shares and the reasons behind their inclusion, simply click here to view it immediately with no obligations whatsoever!
Edward Sheldon has no position in any 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.
///>
