When investing with a second income in mind, high-yielding dividend stocks are the obvious target. But all too often they come with caveats — slow growth, stretched payouts, or uncomfortable risks.
One UK stock however, stands out from the rest: specialist lender Paragon Bank (LSE:PAG) on the FTSE 250.
With a high yield, well-covered payouts and recent double-digit dividend growth, could it become the UK’s next income hero?
A dividend that just keeps growing
In H1 2026, the bank announced an interim dividend of 15.1p, up 11% from 13.6p the prior year. That builds on an 8.66% dividend increase between 2024 and 2025.
Overall, it’s been boosting its dividend payouts at an annualised rate of 18.1% for the past 15 years. In dividend terms, that’s exceptional growth — with only a brief reduction during the pandemic.
The bank’s policy is to distribute roughly 40% of underlying earnings to shareholders, helping to keep income predictable.
Don’t forget the buybacks
Paragon’s yield has fluctuated between 4% and 7% for the past five years, currently hovering around 6.3%. But it’s not the only shareholder reward. The company recently completed a £50m buyback in the first half of 2026 and announced a further buyback of up to £50m.
In doing so, it’s reducing the number of shares in circulation, effectively boosting earnings per share (EPS) and supporting dividend growth.
But buybacks cost money, so is all this spending sustainable?
Strong capital generation
As with any stock, dividend payouts rely on the company generating enough cash. Fortunately, in Paragon’s case, things are looking good.
In the first half of 2026, it generated CET1 capital at an annualised rate of 2.4%, while maintaining a CET1 ratio of 13.5%. Basically, its earnings are enough to fund lending, dividends and buybacks without weakening its financial buffer.
With underlying EPS rising 2.9% in H1 2026 and a 17.4% return on tangible equity (RoTE), the payout looks well supported — provided credit conditions don’t change.
Over the past decade, it’s achieved compound annual earnings growth of 11.4%, with a 40% payout ratio and £683m of buybacks.
But that doesn’t make it risk-free
As a specialist lender, Paragon’s exposed to buy-to-let and specialist loans, so arrears or defaults could pressure profits. If rate changes cause funding costs to rise, it could pressure margins and lead to reduced earnings.
So the risk factors I’d keep an eye on are landlord demand, rental market regulations, and property values.
It’s important to continuously assess external risk factors, because at times, they can create an artificially inflated yield. For now, Paragon appears to be supported by genuine earnings — but it’s always good to keep an eye on developments.
The bottom line
In my opinion, Paragon exhibits some of the most attractive credentials I’ve seen in an income stock for some time. With an attractive yield, consistent growth, a disciplined payout policy and buybacks, it looks like a rising dividend star.
It isn’t risk-free, but for income investors seeking growth as well as yield, I’d say it certainly deserves a closer look.
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Mark Hartley does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
