As a passive income investor, NatWest Group (LSE: NWG) has been on my radar for a while. The FTSE 100 bank’s shares offer a forecast dividend yield of 5.3% that could rise to 6% in 2025.
NatWest looks much stronger to me than it did a decade ago. I do not expect a repeat of past problems. Indeed, I suspect the bank could benefit if interest rates stay higher for longer, as I expect.
NatWest shares have been outperforming the market this year, but they still don’t seem expensive to me. However, there is one reason why I might consider waiting a little longer.
Will private investors be offered discounted NatWest shares?
NatWest made headlines recently when it bought another £1.24bn of its own shares back from the government. The holding belonging to the government has now fallen to under 23%, from a peak of over 80% in 2010.
Prime Minister Rishi Sunak had hoped to organise a share sale to offer NatWest shares directly to private investors this year, potentially at a discounted price. That might have been nice.
However, according to the Treasury, any plans for a retail share sale have now been put on hold. At least until after the election.
Experience tells me that buying good businesses when they’re cheap is one of the best ways to make a profit from shares. But personally, I don’t think it makes sense to wait for something that could easily take another year – and might never happen.
Why I think it’s better to act early
If I buy NatWest shares today, I should benefit from this year’s dividend (about 5.3%) and any further share price gains that take place in the coming months.
If the shares do rise, buying now could also increase the passive income I’ll receive from NatWest in future years.
By (hopefully) buying at a lower price today, I’ll get more shares for my money. In turn, this will mean that future dividends give me a higher dividend yield on cost. That’s the income yield I get relative to the price I paid.
My verdict
Of course, NatWest shares could fall. The bank’s business is built almost entirely around UK consumer and business banking. In a recession, rising bad debts could put pressure on profit margins. The dividend might be cut.
All stock market investments carry some risk, but NatWest shares look fairly safe to me at the moment.
The bank’s first-quarter update reported very low levels of bad debt, with profits up from the final quarter of 2023.
Regulatory ratios used to measure the strength of the balance sheet also looked good to me.
In terms of valuation, the bank’s shares currently trade close to their book value and on less than eight times 2024 forecast earnings. I don’t think that’s expensive.
This year’s expected dividend of 16.7p per share should give a yield of 5.3%. A rising payout is expected to support a 6% dividend yield in 2025.
To me, NatWest looks like a sensible and affordable choice for passive income. If I had space for a bank in my portfolio today, this is a stock I’d consider buying.
