An 8% yield and 35% below its high! This FTSE investment looks excellent to me

With analysts expecting strong future earnings growth, Oliver Rodzianko thinks this FTSE investment is stellar for passive income.

| More on:
Passive and Active: text from letters of the wooden alphabet on a green chalk board

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Key Points

  • The FTSE's OSB Group offers a great dividend yield of 8% and price growth of 127% over the past decade, showing long-term potential.
  • OSB's earnings come from mortgages, savings accounts, and business loans, with a strong net margin of 43% and a competitive three-year revenue growth rate of 12.7%.
  • Risks include economic downturns affecting mortgage payments and interest rate changes.

When looking for a strong dividend investment from the FTSE, I want two main things.

  1. A great dividend yield
  2. A good probability of the shares growing in price, long term

Thankfully, OSB Group (LSE:OSB) seems to have both. In fact, its price is up 127% over the past decade, and its yield is currently 8%. While past returns are no guarantee of future results, those statistics look promising to me.

I could earn from mortgages

OSB is a British specialist in lending money and offering savings accounts for both people and businesses.

Here’s a quick breakdown of its core operations:

  • Special loans: these include for buying rental properties, for small businesses, and for people buying homes in unique situations
  • Savings accounts: these are for people wanting to save money over a range of periods, which helps OSB gather funds to lend to others
  • Business loans: these help businesses for various reasons, but usually for expansion purposes or during periods of economic pressure

So, if I decide to invest in OSB, I’d actually be earning from the mortgages of others. I think many would agree that’s a refreshing break from owing money to a bank for property.

I consider it a strong investment

Here are the main statistics that I particularly like about the company:

  • It has a net margin of 43%, which is at the top of its industry
  • It has a three-year revenue growth rate of 12.7%, which is competitive
  • Analysts are expecting earnings to grow at 43% over the next year and 20.6% annually over the next three years

Also, let’s look at the dividend history, which is remarkably strong, in my opinion. Consider the following graph, showing healthy growth in passive income over the past five years:

One of the things I like about OSB is that it has a niche in specialist lending in the mortgage sector. Because its expertise is in these unique situations for property buyers, it means it has cornered a small portion of the market. That could protect its revenue and dividend over the long term.

Risks if I invest

The largest risk with OSB pertains to the challenge that comes when its mortgage buyers can’t pay their fees because of economic hardships, which could result in times of recession. Because the firm is catering to special situations, it faces a higher risk of defaulted mortgages.

Additionally, if central banks raise interest rates, OSB can benefit, but lower interest rates mean its net margin could contract. Therefore, the business is highly susceptible to the effects of recessions, and I’ve got to be careful if I rely on the dividend from my OSB shares, because this could be cut during hard times.

How I plan to protect myself

I like this business, and I think it’s a suitable investment for me. However, if I buy it, I need to make sure I diversify my portfolio properly to protect me from any hardships that affect OSB specifically. If I do that, I think the investment has a strong place in my financial plan.

When I have some spare cash, I’ll look at potentially buying a stake in OSB.

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.

Oliver Rodzianko has no position in any of the shares mentioned. 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.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »