Forget about Lloyds, Barclays and the FTSE 100’s other major banks. Based on current dividend forecasts, NatWest Group (LSE: NWG) could be considered a much more attractive income stock to buy today.
There’s more to selecting dividend stocks than just by looking at yield (I’ll get onto this later on). But NatWest’s current reading of 11% for 2022 is pretty hard to ignore.
It beats the corresponding yields of all other FTSE index banks. What’s more, the reading remains elevated above 6% for 2023 as well (only HSBC’s yield beats this).
| FTSE 100 stock | 2022 dividend yield | 2023 dividend yield |
| NatWest Group | 11% | 6.2% |
| Lloyds Banking Group | 5.2% | 5.9% |
| Barclays | 4.5% | 5.6% |
| HSBC Holdings | 5.1% | 7.9% |
| Standard Chartered | 2.2% | 2.9% |
However, how realistic do current dividend forecasts currently look? And should I buy NatWest shares for my portfolio today?
Special dividends
In 2021, the UK retail bank paid a total dividend of 10.5p per share. This year it’s tipped to deliver a 28.6p total payout, helped by the delivery of a 16.8p special dividend in 2022.
City analysts aren’t expecting another supplementary payout next year. Though an anticipated 15.9p per share reward still offers that market-beating yield.
A quick analysis suggests NatWest could be in great shape to meet these payouts too. The company’s CET1 capital ratio has fallen steadily over the past year. But this still stood at a robust 14.3% as of September, giving it plenty of financial headroom to support paying out big dividends.
And looking to 2023, NatWest’s predicted dividend is covered 2.7 times by anticipated earnings. A reading north of 2 times is said to provide a wide margin of error should earnings come in lower than estimates.
Rate talk
As an income investor, I’m pretty impressed by the bank’s dividend forecasts. But I’m afraid I won’t be buying its shares for my portfolio any time soon.
NatWest’s bottom line has been driven higher by rising interest rates in 2022. Its operating pre-tax profit rose 12% in the nine months to September (to £3.7bn). Further action by the Bank of England (BoE) next year might continue pushing earnings up for the banks.
That said, the scope for more rate hikes could be greatly limited by broader economic conditions in the UK. BoE deputy governor Dave Ramsden has even said he would “consider the case for reducing [the] bank rate” if the economy weakens.
Long-term worries
NatWest’s profits could also take a whack if, as I expect, the number of bad loans on its books soars. Loan impairments here are already rocketing and hit a forecast-beating £247m in the third quarter.
There’s also a chance of weak revenues growth lasting beyond 2023 too. A long pandemic-related hangover and continued Brexit disruption could hamper Britain’s recovery over the medium to long term. And the retail bank has no exposure to foreign markets to offset any weakness at home.
As I say, NatWest’s dividend forecasts look very attractive. But given the rising risks it faces, I’d rather buy other UK income stocks today.
