I know, I know. Lots of small, private investors like me love the passive income prospects of National Grid (LSE: NG). Utilities are seen as defensive businesses. National Grid aims to raise its dividend in line with inflation so, in theory, what the shares generate in passive income maintains its purchasing power over time.

At the start of 2025, just as now, I had no plan to buy National Grid shares. Since then they have moved up 16% (almost in line with the 17% growth seen in the FTSE 100 so far this year).

But I think events this year have actually vindicated my choice to avoid the share, and have no plans to invest now.

Here’s why!

A good goal, missed!

National Grid’s stated aim of raising its dividend per share each year, at least in line with a leading measure of inflation, is attractive to me as an investor.

It helps to put my mind at rest about one of the risks I see with dividend shares, that it could grow slower than inflation, basically meaning it is actually shrinking in real terms over time.

The problem is that while National Grid’s goal is attractive to me, it has not been able to deliver on it. This year, it sharply reduced its dividend per share.

Not only that, but management presented that cut in language I felt was less than clear. It emphasised that a shareholder would still be receiving the same amount of dividends if they had taken up a rights issue which offered them the chance to buy more shares, at a cost.

The reality is that National Grid shares each pay a lower dividend now than they did a year ago.

A costly business model

Why is that? It reflects the cash flows within the business.

When investors get excited about the defensive characteristics of utilities, as many do, they tend to zoom in on the fact that a captive audience of customers have a need for the service with few, if any, alternative providers to choose from. That is indeed true of National Grid.

But what people sometimes miss when focusing on that demand picture is the supply side. Running a national power grid is an expensive business. Even when it is unchanged, maintaining the infrastructure is costly.

Recent years have seen changes both in where power is produced and where it is consumed. Keeping the grid up to date therefore becomes even costlier.

Last year, National Grid raised billions of pounds selling new shares. Despite that, this year its already sizeable net debt has grown further — and the dividend per share has been cut.

Put simply, the economics of maintaining, let alone updating, the company’s infrastructure require sizeable ongoing capital expenditure.

That explains why the company cut its dividend per share this year. It also means there is a risk of further such cuts in future. So I will be avoiding National Grid shares on that basis!