I believe that National Grid (LSE:NG) is one of the best FTSE 100 stocks out there. I class it as a defensive stock based on its position within the UK’s energy infrastructure. Furthermore, it has an excellent dividend yield to help me make a passive income. It’s latest move has solidified my stance too.
National Grid owns the electricity transmission network in England and Wales. In addition to this, it owns and operates the high-pressure gas transmission system in Great Britain too. I have always classed energy and infrastructure stocks as defensive as they are essential commodities required by everyone.
Last week National Grid announced it was buying the holding business of Western Power Distribution. Western Power Distribution is classed as the UK’s largest electricity distributor. The deal is worth a mammoth £7.8bn. Part of the deal sees NG selling one of its US division’s electricity businesses for $3.8bn. These deals are ensuring that National Grid’s UK arm is strengthening its grip on the electricity market in the UK. I believe such a big move makes NG a great FTSE 100 pick.
FTSE 100 opportunity
As I write, I can buy shares in National Grid for 855p per share. This is still 5% lower than this time last year. I consider its share price to be relatively cheap. To provide further context, in February 2020, shares were trading for over 1,000p per share. I believe these levels could be seen once more.
The average yield for a FTSE 100 company is 3%. Keep in mind that a higher yield isn’t always a positive. A high dividend yield could indicate a business in trouble. The yield could be high because the company’s shares have fallen in response to financial issues, and the struggling company hasn’t cut its dividend yet. I do not believe this is the case for National Grid.
As I write this, NG’s yield is over 5%. NG’s policy of raising its dividend per share by the retail price index (RPI) makes me believe that its dividend yield could be 6%-plus later this year. If this happens, I would class it as one of the best FTSE 100 dividends, and it would certainly be a top passive income opportunity too, in my opinion.
National Grid rewards aren’t without risk
National Grid is in a heavily regulated industry, which presents some risks. Regulators could enforce a profit cap which may affect investment viability. In addition to this, it could face massive capital expenditure in the face of repairs if anything significant were to affect its network. This expenditure can affect the bottom line and affect investor confidence too. The threat of nationalisation always looms in the background too.
Aside from the risks, I believe there is a lot to like about National Grid, which is why I class it as a top FTSE 100 pick. Its recent ambitious move, coupled with a cheap share price and a juicy dividend yield make me believe it could be a fruitful addition to my portfolio.
As a savvy investor, I like to diversify my portfolio. Here is another FTSE 100 stock I like that has fallen in price.
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Jabran Khan 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.
Motley Fool UK 2021