Should I buy NatWest shares for their dividends now?

NatWest shares might just hit a dividend yield of around 11% in 2022, that won’t last, but I still think this is solid income stock.

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Key Points

  • NatWest shareholders are in line for a potential dividend yield of over 10% in 2022, including special dividends
  • NatWest is well positioned to benefit from rising interest rates, making maintaining the +5% regular dividend yield more likely than not
  • If enough customers start to struggle with higher inflation, then loan defaults and arrears could start to offset any gains NatWest makes from higher interest income

NatWest (LSE: NWG) shares have to be on the mind of income investors. At the end of July 2022, NatWest announced a 3.5p per share interim dividend along with its half-year numbers. That’s a £330m interim payout. Along with the plan to distribute £1bn to shareholders in total annual dividends, I can estimate the final dividend to be 9.6p per share, for a total of 13.1p. That, given the NatWest share price is 257p right now, gives an expected dividend yield of 5.1%.

NatWest shares 2022 dividends

A 5.1% yield on NatWest shares is something I would be interested in, but it gets better. A 16.8p per share special 2022 dividend, has been proposed, subject to shareholder approval at a general meeting tomorrow. That would bump the dividend yield for this year towards an exceptional 12% for 2022, assuming my calculations are correct and the following dividends are paid:

  • Interim dividend 3.5p per share
  • Planned special dividend 16.8p per share
  • Estimated final dividend 9.6p per share

It’s too late to buy shares and be eligible for the interim dividend. But there is time to buy and be registered as a NatWest shareholder on 30 August 2022, and be eligible for the special dividend and those beyond. So, given that information, would I buy shares in NatWest now?

NatWest banked a solid start to 2022

I don’t want to focus on the special dividend too much. It’s a one-off. But a regular dividend yield of 5% or so on NatWest shares is better than the FTSE 100 average of 3.6%. The question is whether NatWest can maintain this, or perhaps improve on it?

Well, business is good at the bank. NatWest reported strong performance for the first half of 2022:

  • Profit before tax up 12.8% compared to the first half of 2021
  • Return on tangible equity of 13.1% compared to 11.7% in 2021
  • Income growth of 16.2% compared to the first half of 2021
  • Net lending growth of 2.6% in the first half of 2022
  • Costs down 1.5% over the first half of 2022 relative to same period in 2021

The Bank of England (BoE) raising interest rates has helped NatWest. In fact the bank might just be the best positioned. I read in Shares magazine that research by Numis, a stockbroker, indicated that each 0.25% rise in the BoE’s base rate raises NatWest’s net interest income by 5.5%.

Is it a good time for me to buy NatWest shares?

So NatWest does better with rising rates, and rates are anticipated to rise. But there is of course the issue of whether the inflationary environment driving the rate rises will start to hurt NatWest via loan defaults or arrears. Will NatWest see credit and loan applications dry up, or be forced to curtail lending itself and hurt its income? I don’t know, and neither does the bank, for sure. But, NatWest is making provisions and is well-capitalised — enough to return substantial amounts to shareholders and leave its capital adequacy ratios well above minimums.

Beyond the immediate concerns there is growing competition from challenger banks in the digital space, but NatWest is responding. Overall, I would buy NatWest shares ahead of the deadline for the special dividend payment.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James J. McCombie owns shares in NatWest. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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