Over the last five years, National Grid (LSE: NG.) shares have lived up to their reputation as a reliable dividend payer. A £5,000 investment would have generated around £1,660 in passive income alone.

But it’s not just about income. The share price has also risen around 58%, taking the total return to roughly £9,560 – equivalent to an annual return of 14%.

That’s the part many investors overlook. So-called income stocks aren’t just about yield — they can quietly build substantial wealth over time through a combination of dividends and steady capital growth.

The real question now is whether the stock can continue delivering that same compounding over the next five years.

Mispriced stock

What’s interesting about National Grid right now is not what the business is, but how the market is still pricing it.

For much of the past few years, sentiment has been shaped by higher interest rates. As bond yields rose, investors increasingly treated utilities as bond proxies, leaving the shares anchored to a ‘low growth, high income’ perception.

But that framing is starting to look outdated.

Electricity demand is no longer stable — it’s accelerating in ways many investors are still underestimating.

AI data centres are a clear example. They’re not just adding incremental demand; they’re creating concentrated spikes in electricity usage that existing grid infrastructure wasn’t designed to handle. In many regions, the constraint is no longer generation, but transmission capacity.

That matters because grid operators sit directly on that bottleneck.

Capital expenditure is shifting away from routine upgrades. It’s now driven by demand-led expansion and structural capacity shortages rather than regulatory cycles alone.

Electrification of transport and heating is adding further pressure. EV adoption and industrial electrification are accelerating the shift onto the grid.

Taken together, this creates a very different backdrop from the ‘slow utility’ narrative the market still leans on.

Risks

As a heavily regulated utility, the company’s returns are ultimately set through negotiations with policymakers. If outcomes are less favourable than expected, allowed returns could fall, impacting earnings and shareholder value.

This is amplified by the group’s large, capex-heavy investment programme, which is funded in part through leverage. Higher interest rates or weaker regulatory settlements could therefore pressure both the balance sheet and long-term returns.

What’s the verdict?

What ultimately matters for National Grid is not short-term sentiment, but the steady expansion of its regulated asset base — the capital it’s allowed to earn returns on.

Every pound invested into upgrading and expanding the grid is added to this asset base, and regulators then set returns on that growing pool of capital. In other words, the more efficiently it invests in essential infrastructure, the larger its earnings base becomes over time.

This is why demand matters so much. Rising electricity usage from AI, electrification and data centres is not just a volume story. It directly drives more grid investment and grows the asset base, which supports long-term cash flows.

In its latest year, the regulated asset base grew at around 10%, highlighting the strength of this compounding mechanism even in a higher-rate environment.

It’s this combination of visibility, inflation linkage and structural demand growth that drives my view. The market still underestimates the long-term income potential. That is why I recently added it to my position.