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NatWest‘s (LSE:NWG) one of the first shares I ever bought. I didn’t know much about what I was doing back then and my reasons for buying weren’t very good.
As a beginner, I was taken with a share price below £2.50. That seemed low, but I didn’t pay attention to the number of shares it would take to start earning meaningful income.
Dividends
Fast forward to today and – despite the stock climbing almost 400% in the last five years – the NatWest share price is still below £5. But that’s only half the equation. In terms of dividends, the company’s returned 25p per share over the last 12 months. So someone looking to earn £1,000 a year would need exactly 4,000 shares.
Despite a low share price, that’s still a £21,184 investment (not including taxes like stamp duty). But the dividend’s grown consistently over the last few years.
Five years ago, NatWest didn’t pay a dividend at all. And while that’s a useful reminder to investors about some of the risks with bank stocks, things were quite different then.
Ups and downs
Interest rates are much higher now than they were five years ago. And that’s been a big boost for UK banks in general, but things are already showing signs of reversing.
The Bank of England has started bringing rates down and it looks like there’s more to come. But NatWest’s rising dividend hasn’t just been down to cyclical factors. The bank’s strengthened its own position in ways that should be durable. Most obviously, the bank has bought back shares that were owned by the UK government.
In doing so, NatWest has reduced its share count by around 25% since 2020, increasing the value of each remaining share. Unless something drastic happens, that change should be permanent.
When to buy?
NatWest’s improved position means I think it’s worth considering for dividend investors. But I’m doubtful about whether this is the right time to think about this type of stock.
That’s not a prediction about where the share price is set to go in the near future. It’s about what I think is likely to happen to the company’s earnings (and dividends) over the long term.
The dividend yield at the moment is 4.5%. Given the risk of lower returns in future if rates fall, I don’t see this as a particularly attractive income opportunity.
Right now, things look good for NatWest. But I think the cyclical nature of the business means the time to consider buying the stock is when there’s more pessimism around.
Foolish thoughts
I’m a big fan of investing in cyclical businesses – I think short-term challenges can give long-term investors chances to buy shares at bargain prices. But that’s not where NatWest is right now.
I don’t see the bank going back to where it was in 2020, when the dividend was cut entirely. To attribute all of its earnings growth since then to a favourable lending environment is a mistake.
Those internal improvements mean the bank’s one for dividend investors to keep on their radars as interest rates all. But I think there are better opportunities available elsewhere at the moment.
