Wednesday 3 April 2013

5% Return, Inflation-Proofed and a New Dilemma

Yes, you read that right: a current 5% annual return, guaranteed (almost) to be raised in line with inflation.

Nothing else that I am aware of can equal this real (after inflation) return promise: index-linked gilts currently have negative yields and NS&I is not currently offering any index-linked products. So who is offering this?

National Grid (LSE.NG) has always been very pro-dividend but in its announcement on 28th March it unveiled its new dividend inflation promise:

"The Board of National Grid has agreed a new dividend policy to apply from 1st April 2013. The new policy will aim to grow the ordinary dividend at least in line with the rate of RPI inflation each year for the foreseeable future."

The prospect of even higher increases is also raised, subject to the company's debt conditions.

As I already hold NG, this should be good news, shouldn't it. Well, sorta...this policy replaces an 4%increase in dividends: whether this is good or bad depends on your view of future inflation. However, for me it leads to a familiar dilemma - the ever-constant struggle between:
  • increase in capital value (and the temptation to grab an increase in value before it evaporates)
  • current/future income yield 

NG is currently yielding 5% and I am sitting on a 32% gain. In the case of NG, my self-imposed 'sell' indicator is at 4.7 - when it reaches 5.0 I usually think about selling, if the yield is below my portfolio average - currently 5.7%. (This 'sell' indicator is the capital gain divided by the current annual income or dividend - i.e. the number of years of current income already earned by the capital growth). By selling, I should be able to reinvest at a higher yield, or at the very least continue my diversification strategy (reducing my reliance on Sterling).

This new dividend guarantee means that, at my original purchase price, I am earning a 7% return, which is now 'guaranteed' to continue into the future in real terms. And given NG's utility status, one would expect their promise to be fairly iron-clad.

So hold or sell? For a DIY Income Investor, it should be all about income: which action will yield more income now and in the future? It's a dilemma.

However, for those of you that don't already own NG - this might be an opportunity to grab a pretty good inflation-proofed dividend income stream for the next couple of years.

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. I own this share as well (bought at 574). I would say in this case hold. I would also look again at your sell indicator as in some cases you run the risk of selling good shares for the sake of albeit a decent short term profit.
    Are there other shares out there as solid as NG where you can currently get 7% yield that is inflation protected?

    1. Hi Anon

      Good points - knowing when to sell is difficult. I'll try to hold on a little longer!

      However, one thing I have learnt is that 'things do change' (look at Apple). Banking 5 or 6 years of this yield might bea good move - a lot can change in that time.