I’m such a big fan of this UK dividend stock that I added it to my Self-Invested Personal Pension (SIPP) six months’ ago. My timing wasn’t good.
The stock is NatWest Group (LSE: NWG), which I bought in early May. Its shares carried on climbing for a while, but have slumped 18% over the last three months. Basically, I’m back where I started. This isn’t unique to NatWest: the big banks have all slipped as investors grew wary.
Banks lose their lustre
After years of rising profits, dividends and share buybacks, investors either felt they’d gone far enough or chose to bank some of their profits.
There are wider worries, of course, including exposure to private credit, shadow banking and a potential artificial intelligence (AI) bubble. Higher government bond yields have also given investors better rates of income, with less risk to their capital, while fears of a hike to the bank windfall tax in last month’s Budget didn’t help.
NatWest’s third-quarter pre-tax operating profit (30 October) landed as expected at £2.23bn, but net interest income missed forecasts. The board expects interest margins to stabilise around 2.5% into 2027, but investors had hoped for growth.
The Budget’s temporary increase in the bank surcharge was another blow, even if the rise from 3% to 6% was lower than some feared, and limited to 15 months.
Profits and payouts
When I buy shares, I aim to hold them for decades and ideally for life. The recent dip’s neither here nor there, except in one respect. It’s an opportunity to buy more.
I’m sorely tempted. I’ve done very well out of buying high-yielding FTSE 100 dividend stocks with single-digit price-to-earnings ratios, notably Lloyds and financial stocks M&G and Standard Life.
NatWest made £7.7bn pre-tax profit in 2025. Currently, it’s forecast to make between £8.6bn and £9.5bn in 2026. Management also expects an impressive return on tangible equity above 19%.
The board has been generous with dividends, hiking shareholder payouts 51% to 32.5p a share across 2025. The latest interim payment was hiked 26%, from 9.5p to 12p. NatWest completed £1.5bn of share buybacks last year, and there could be more on the way.
Tempting, but not bulletproof
NatWest looks cheap with a trailing price-to-earnings ratio of just 8.7. The forecast yield’s a handy 6.25% in 2026, rising to 6.63% in 2027.
There are risks. Higher interest rates could squeeze borrowers, increase bad debts and weaken demand for loans. NatWest’s impairment charge rose to £277m in the third quarter, up from £153m a year earlier. Competition for mortgages and deposits could limit its ability to grow margins.
Banking’s a key UK sector, but as we saw during the financial crisis, it isn’t bulletproof. I’m worried about getting overexposed to its fortunes, as I already hold Lloyds and a small stake in HSBC.
Yet at this valuation, and with that income, I think it’s well worth considering. Investors who fancy an even higher yield of almost 7% should also check out this FTSE 100 stock….
What income stock do we like better than NatWest Group Plc right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at an income share we think is worth your time.
Harvey Jones owns shares in HSBC, Lloyds, NatWest, M&G and Standard Life.
This story originally appeared on Motley Fool
