Building up holdings of an income-paying FTSE 100 stock isn’t a bad strategy. When combined with a well-diversified portfolio, it can provide valuable dividends that can help to boost the overall yield of the investment pot. Here’s one idea that recently caught my eye that has the potential to deliver robust returns.
The company I’m keen on
The stock I’m referring to is NatWest Group (LSE:NWG). The FTSE 100 banking giant isn’t just made up of NatWest. Rather, it also includes RBS and Coutts, which generate sizeable revenue in their own right.
Over the past year the share price has fallen by just 1%. The dividend yield sits at a generous 5.8%.
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I feel the business will be able to continue to pay out income going forward, which is a key part of the strategy. Total income in Q1 2023 jumped by just over £1bn on the same period in 2022. This 37.2% increase was mostly driven by the move higher in interest rates.
Not only does this show that 2023 is off to a good start for revenue, but I feel it can continue to push on. This is because the net interest margin was 3.27% in Q1. There’s a lag between this and the increase in the base rate, which now sits at 5%. Therefore, I’d imagine this margin will increase closer to 4% by the end of the year, helping to further increase revenue.
Although this will help to keep dividends flowing, I do note the risk of possible loan defaults. Coutts is a private bank that serves wealthy individuals. Yet the other brands target a wider customer type. That said, even the rich could default on mortgages and other loans due to high rates. This could provide unwelcome losses from this division.
Working out the numbers
Unless investors have a large lump sum to deploy, I feel the best way to build up dividend potential from NatWest is via regular investing.
If I invest £200 a month and reinvest any dividend income I receive, I’ll hit my goal just before year 10. From that point onwards, I’ll own enough NatWest shares to not have to purchase more of them. On an annual basis I should then receive £1,800, which equates to £150 a month on average.
The share price is going to fluctuate over time, but for the purpose of generating a figure, I’ll assume it stays flat at 232p. Using that price I’d need to buy 13,380 shares in order to get enough to make me the income I require.
Granted, this amount could be lower or higher in the future. That’s one problem with trying to forecast very far in advance. Yet the bottom line is that if I’m disciplined in putting some money away each month in this banking stock, then I’d hope to reach my goal.
