EDITOR’S NOTE: a previous verson of this article incorrectly stated the yield was 15%
I’m trying to create a second income through dividend-paying stocks.
I believe NatWest (LSE: NWG) shares could help with this. Here’s why I’m bullish on them.
Mixed fortunes
NatWest, like the other “big four” banks in the UK, has endured mixed fortunes recently. A high interest rate environment has its pros and cons. Higher rates mean it can profit from increased payments received from its customers. Conversely, these same higher rates have caused issues and more propensity for defaults too. A double-edged sword indeed.
NatWest shares have edged upwards over a 12-month period. As I write, they’re trading for 235p, whereas at this time last year they were trading for 221p, 6% lower. The shares reached 308p in February. When the impact of macroeconomic difficulty took its toll, they pulled back to current levels.
Second income potential
What drew me to consider NatWest shares in the first place is the mammoth 13% dividend yield. Yes, you read that correctly, 13%. This is calculated based on last year’s full dividend per share of 30.3p and the current share price. In this instance, divide the annual dividend of 30.3p by the current share price of 235p, and multiply this figure by 100, offering a yield of 13%.
A high yield can be a sign of trouble. For example, the share price falling off a cliff that pushes a yield up. However, this is not the case for NatWest. The business is due to release a trading update next month. This should tell us how sustainable its returns are so I’ll be keeping a keen eye on that. Remember, dividends are never guaranteed.
Digging a bit deeper, NatWest did pay an interim dividend of 5.5p. This was a considerable jump from the 3.3p it paid at the same time last year. That’s a positive sign for me.
Next, NatWest shares look good value for money to me right now on a price-to-earnings ratio of six. The average ratio for banks is just over 10.
On the other side of the coin, NatWest has been in the headlines for all the wrong reasons recently. The Nigel Farage scandal, when it cancelled his account, shone a negative spotlight on the business and negative PR is never good for investor sentiment. Will it impact its balance sheet, dividends, and potential to provide investors with a second income? I highly doubt it, but still, anything that could damage a firm’s reputation is something to be wary of.
The other issue is current economic uncertainty. The Bank of England didn’t increase the base rate recently but that doesn’t mean rate rises are definitely over. Further interest rate rises, the fight against inflation, and the current cost-of-living crisis mean there could be some turbulence ahead for the shares.
Final thoughts
I’m bullish on NatWest shares. With a decent valuation, potential to boost passive income, and a good market position, there’s plenty to like. I’d be willing to buy some shares when I am able to do so. I think they can help increase my chances of building a lucrative second income via dividends. I would caution any investors considering the shares that there is potential turbulence ahead, at least in the short term.
