National Grid (LON:NG.) Will Pay A Larger Dividend Than Last Year At £0.3912

The board of National Grid plc (LON:NG.) has announced that it will be paying its dividend of £0.3912 on the 19th of July, an increased payment from last year's comparable dividend. This makes the dividend yield 6.6%, which is above the industry average.

View our latest analysis for National Grid

National Grid's Payment Has Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, the dividend made up 97% of earnings, and the company was generating negative free cash flows. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.

The next year is set to see EPS grow by 40.8%. If the dividend continues along recent trends, we estimate the payout ratio will be 71%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

National Grid Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from an annual total of £0.446 in 2014 to the most recent total annual payment of £0.585. This means that it has been growing its distributions at 2.8% per annum over that time. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

Dividend Growth May Be Hard To Achieve

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. We are encouraged to see that National Grid has grown earnings per share at 6.1% per year over the past five years. Although per-share earnings are growing at a credible rate, the massive payout ratio may limit growth in the company's future dividend payments.

National Grid's Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think National Grid will make a great income stock. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. We don't think National Grid is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for National Grid (of which 2 don't sit too well with us!) you should know about. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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