When markets are volatile, like now, finding good passive income stocks is not an easy feat. I’d expect some turbulence, but I’m an advocate of long-term investing, which should help ride out the uncertainty. With that in mind, I believe investors should consider buying Close Brothers (LSE: CBG) shares for juicy dividends. Here’s why.
Specialist financial services
Close Brothers is a leading UK merchant banking and specialist financial services business. It provides lending, deposit taking, wealth management, and securities trading to its 3m customers.
The Close Brothers share price has meandered up and down in recent months, due to soaring interest rates and rising inflation. As I write, the shares are trading for 869p. Over a 12-month period, they’re down 9% as they were trading for 960p at this time last year. I’m not worried by this drop. In fact, it’s made an enticing stock look even more appealing to me.
A great passive income stock with risks to note
Although I’m bullish on Close Brothers shares, I’m aware of some risks that could impact the business. Rising interest rates represent a conundrum for financial services stocks. These higher rates can increase income and boost a balance sheet, which can help performance and payout. On the other side of the coin, the same rise in rates can cause more loan defaults, which can hinder performance and payouts.
One issue that has already impacted Close Brothers, and could do so again in the future, is that of failed acquisitions. It acquired Novitas in 2017, a legal lending business. Unfortunately, it hasn’t worked out and it had to repair this costly mistake, which has impacted profits. Acquisitions are great when they work out but costly and damaging when they don’t.
Moving to the bull case, the Close Brothers passive income opportunity looks excellent, in my opinion. A dividend yield of 7.8% is higher than the FTSE 250 and FTSE 100 averages of 1.9% and 3.8%. Furthermore, it has a good track record of payout, including paying out during the pandemic when many other businesses halted dividends. However, I do understand past performance is not a guarantee of the future and businesses can cancel dividends at any time.
Finally, Close Brothers’ most recent full-year results, published a few weeks back, looked good to me. This is even with the negative impact the Novitas issue had on the business. Profits were impacted, but the business increased its dividend. The report said this was because of “the board’s continued confidence in the business model”. Furthermore, the business continues to grow all of its five segments, which boosts its diversification and is pleasing for any investor to see. If one area were to suffer, another thriving segment could help offset this. That shows me that there’s a level of protection there.
Final thoughts
Overall, I think Close Brothers could be a great passive income stock. Like any financial services business right now, there are some headwinds to navigate. In the longer term, the business looks solid with good fundamentals and a positive investor returns policy, even during market volatility and a period of downturn. These are the reasons why I believe investors should look into buying Close Brothers shares.
