Dividend investing can be a great way to earn a second income. Fortunately, there are plenty of UK shares that offer attractive yields at present.
One FTSE 250 stock that stands out to me is Anglo-African specialist bank Investec Group (LSE:INVP). The banking and wealth management company currently provides a 6.44% dividend yield and boasts an impressive recent trading history. Indeed, the Investec share price has rallied 279% since its pandemic low in September 2020 and is up 36% over five years.
So, should investors who can afford it consider buying 3,874 Investec shares today for £1,200 in annual passive income? Here’s my take.
The business model
Investec combines asset management and specialist banking in its business model, deriving most of its revenue from the latter division.
In an impressive set of FY23 results released in May, the group’s total operating income rose 14.6% to £2.28bn and adjusted operating profit soared 21.1% to £869.5m.
| Division | Operating income | Operating profit |
|---|---|---|
| Specialist Banking | 78% | 84% |
| Wealth & Investment | 21% | 14% |
| Group Investments | 1% | 2% |
Investec serves institutional, corporate, and private clients around the world. Although the company’s client base is global in nature, it’s particularly concentrated in Britain and South Africa.
This emerging markets exposure gives the business access to high-growth opportunities, as well as presenting significant macroeconomic and political risks for investors.
Dividend income
As I write, the Investec share price is £4.81. Therefore, buying 3,874 shares would cost a total of £18,633.94. Helpfully, this neatly fits within the £20k annual contribution allowance for a Stocks and Shares ISA.
With that shareholding, investors might be able to expect a second income of £1,200 a year at today’s yield. Considering dividend cover is robust at 2.2 times earnings, there’s a healthy margin of safety on offer.
However, £18.6k is a lot to invest in a single stock. Accordingly, investors managing smaller portfolios may wish to consider spreading their investments across a variety of companies and sectors to gain the benefits of portfolio diversification.
Risks
Although Investec shares have a solid dividend outlook and approximately 16% upside at today’s levels, according to the consensus City price target, there are causes for concern that potential investors should note.
South Africa is a jurisdiction with particularly high political risk. Unemployment stands at over 30% and civil unrest is growing due to rolling electricity blackouts and soaring living costs.
Considering Investec generated 52% of its adjusted operating profit in South Africa, the dual-listed lender faces specific risks relating to its core markets not shared by many other FTSE 250 shares.
In addition, the bank can attribute much of its strong recent performance to rising global interest rates. With signs central banks could be taking a breather after a series of aggressive hikes, Investec’s growth trajectory might slow as a consequence.
A stock to buy?
Thus far, Investec shares have secured a stronger post-Covid recovery than major FTSE 100 banks from Barclays to Lloyds. Today, the stock looks reasonably cheap with a price-to-earnings (P/E) ratio of just 5.4 and a chunky dividend yield.
Despite the risks, I’d buy this stock if I had spare cash. Overall, I believe it merits serious consideration from investors seeking a healthy second income.
