Is the National Grid 5.64% dividend safe?

There is some evidence that buying progressive dividend payers with solid balance sheets is a strategy well-rewarded by the market. After all, who doesn’t like a steady stream of predictable cash payments?

Large cap Multiline Utilities operator National Grid (LON:NG.) yields 5.64% in dividend payments - a useful yield for income seekers. However, the group's latest half-year results show a 5% decrease in revenue to £6.35bn and a 32% drop in net profit to £428m. With this in mind, how safe is National Grid's dividend?

Earnings per share divided by dividend per share is called dividend cover - and it’s a great way to quickly gauge a company’s capacity to continue its dividend payments.

How to interpret National Grid’s (LON:NG.) dividend cover

Generally speaking, a dividend cover of below 1.5 times is cause for concern. Above 1.5 is good, but it is when you are getting above two times cover that you see the sign of a high-quality, sustainable dividend payment.

National Grid’s trailing twelve month earnings per share are 99.9p and its trailing twelve month dividend per share is 47p. Dividing the former by the latter shows that National Grid has a trailing twelve month dividend cover of 2.13.

This is a positive sign for shareholders of National Grid. Other checks you can perform to assess dividend safety include:

• Checking the current ratio is above 1.5 times and preferably above 2x
• Making sure dividend per share is covered by free cash flow per share
• Assessing balance sheet health by looking at the group’s gearing ratio

Income investing: what you need to know

For many investors, dividends are a vital part of their long-term strategy. That's why we have created a variety of income-focused stock screens, such as the Best Dividends Screen, to identify promising candidates for income portfolios. Take a look and see if any of the qualifying stocks might be worthy of further research.

If you’d like to discover more about dividend investing, you can read our free ebook: How to Make Money in Dividend Stocks.