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Earlier than I make investments any hard-earned cash in a inventory with the intention of securing long-term passive earnings, I prefer to run by means of a number of guidelines objects.
Not every little thing will come out tops on each one. However the extra passes than fails the higher, and it helps me kind my choices into some form of precedence.
I’ll run by means of it right this moment with a inventory from my candidates record, Nationwide Grid (LSE: NG.)
Test 1: dividend
Is a dividend important? Anybody who purchased Rolls-Royce Holdings shares in 2020 may promote some for money now. And so they’d doubtlessly get extra passive earnings than from 20 years of Nationwide Grid dividends.
However dividend shares are usually much less dangerous and require much less consideration. I purchase shares within the hope of by no means having to consider when to promote.
Nationwide Grid has a forecast dividend yield of 4.3%. It’s not the largest within the FTSE 100, however it’s affordable and it passes test #1.
Test 2: cowl
I need to really feel moderately assured that an organization can maintain paying its dividends from earnings.
Nationwide Grid hasn’t at all times managed to do that. However over the long run, we’ve seen earnings overlaying the dividend round 1.1 to 1.2 instances, reaching 1.3 instances for the 2025 12 months simply ended.
Once more, that’s not the perfect. However there’s good long-term earnings visibility, which may imply much less earnings security margin wanted. Test #2 is sweet sufficient for me.
Test 3: historical past
Saying that, 2025 cowl was increased as a result of the corporate minimize its dividend per share. The entire money payout was the identical, however final 12 months’s shock fairness increase to generate new capital meant extra dilution per share.
Previous to that we’d had a few years of stable progressive dividends. And I might, maybe naively, have thought a minimize was close to unattainable. I now worry the potential of additional fairness points inflicting extra dilution. I’m uncertain, so I’ll go 50/50 on #3.
Test 4: forecasts
Wanting ahead, the corporate has reiterated its intention to pay extra in dividend money annually. And forecasts at the moment bear that out, displaying 1.8% and a pair of.2% will increase for 2026 and 2027, respectively. They’re not massive jumps, however ought to hopefully match inflation.
I’d ideally prefer to see few extra years of Nationwide Grid again to progressive dividends with none additional dilution. However I give it a cautious move on #4 for now.
Test 5: debt
I at all times test debt for each firm I contemplate, as it could possibly affect the dividend throughout a troublesome spell. Nationwide Grid’s web debt reached £41.4bn in 2025. And it’s forecast to succeed in as excessive as £52.8bn by 2027, for a 27% improve in simply two years. Test #5 is a transparent fail.
Verdict
These checks aren’t complete. And each firm could have its personal particular dangers which we actually want to research. However I see this as a helpful begin.
I’ve generally considered Nationwide Grid as presumably the perfect dividend inventory I’ve by no means purchased. However it solely scores 3.5 out of 5 (and a kind of is cautious). I nonetheless assume passive earnings buyers ought to contemplate it. However within the brief time period, different shares rating higher on my guidelines.
