Investors looking for passive income from dividend shares have a lot of choices. But National Grid (LSE:NG) has been doing well lately.

The stock is up almost 20% in the last 12 months and the company just increased its dividend. So is now a good time to think about buying?

Passive income

Utilities stocks are often sensible choices for income investors looking for stability. Competition is limited and demand never goes away.

That usually makes the companies some of the most predictable on the stock market. Despite this, they often have some attractive dividend yields.

National Grid has just declared a 32.14p final dividend, taking the total for the year to 48.49p. So for £1,000 a year, investors need 2,063 shares.

The stock is trading at £12.81, which means a dividend yield of 3.79%. That isn’t bad – relatively predictable returns in other sectors often command higher prices.

All of that means there are reasons to be interested in National Grid shares. But is £26,427 to earn £1,000 a year a good deal?

Regulation

For National Grid, limited competition comes at a cost. The amount the company is allowed to make is also restricted by regulations set by Ofgem.

At the moment, the company is in something called RIIO-3. Basically, that’s the regulation framework for the next five years.

RIIO-3 allows National Grid a 5.7%–6.1% annual return on its rateable assets. That’s not bad, but this isn’t guaranteed beyond 2031.

That means National Grid’s profits aren’t as predictable as they might seem at first sight. It’s also worth noting that lower rates have meant lower dividends.

For a relatively predictable business, the dividend has been quite choppy. And that’s a reminder that every business goes through ups and downs

Source: Fiscal.ai

There are, however, potential opportunities ahead even beyond regulation. So, could these drive future growth and justify looking at the stock?

What else do investors need to think about?

National Grid isn’t going to get a rate increase until (at least) 2031. But the firm can grow by increasing the asset base it’s allowed to earn that return on.

On the face of it, there are some promising opportunities here. Electrification is one and growing power demand from data centres is another.

This could drive significant growth, but there are a couple of things to pay attention to. The first is how this is going to be funded.

If it involves significant amounts of debt, that might mean higher borrowing costs cut into the allowed return. But there’s also another issue.

Analysts at UBS have pointed out that National Grid’s enterprise value is well above its rateable asset value. And that creates another risk.

Any delays due to planning approvals or supply chain issues could result in disappointing returns. That’s something else investors need to consider.

Final thoughts

From National Grid’s perspective, RIIO-3 is an improvement on RIIO-2. And there might well be meaningful opportunities ahead.

The trouble is, the stock is already up quite a lot as a result. So my view is that there are more compelling opportunities to consider elsewhere right now.

That, however, could change quickly in an uncertain world. Given this, I think it’s worth keeping on the radar in case something dramatic happens.

Stephen Wright does not hold any positions in the companies mentioned.

The post How many National Grid shares does an investor need to earn £1,000 a year in dividends? appeared first on The Twelfth Magpie.

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