Are NatWest shares a smart buy for passive income?

Should investors looking to bolster their income be considering NatWest shares? This Fool explores the issue and explains what he’d do.

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NatWest (LSE: NWG) shares have been gaining pace impressively in 2024. Year to date, the bank has climbed a cracking 45.2%. That far outperforms the FTSE 100, which is up 7% across the same period.

I’ve had NatWest on my radar for a while now. There are a few reasons I keep getting drawn back into the stock. One is for the potential passive income.

As I write, its dividend yield sits at 5.3%. That’s higher than the Footsie average of around 3.6%. Looking ahead, it’s predicted that its yield could rise to 6% in 2025.  

Dividends are never guaranteed. However, with its payout covered nearly three times by trailing earnings, the bank is in a strong position to keep rewarding shareholders. We’ve also seen this in action with the £300m share buyback scheme it announced in February.

A holistic approach

With that, I’d happily buy NatWest shares as a source of passive income. However, I like to take a holistic approach when investing. A meaty yield is nice, but I also want to see there’s potential for share price growth.

With NatWest, I do see that. To start, its shares look undervalued. They currently trade on 7.1 times earnings. That looks like a steal, to me at least. Further, the price-to-book ratio, a more common metric used for banks, is just 0.7, where 1 is fair value.

A government sale?

A potential government sale does throw a spanner in the works. It’s something I’ve been keeping a close eye on.

The latest update we have is that the government’s stake has now fallen below 23% after NatWest recently bought back another £1.24bn of its own shares. As we’re set to head to the polls on 4 July for the general election, any plans for shares being offloaded to retail investors have been put on the back burner.

Uncertain times ahead

There’s obviously a high level of uncertainty here. The Labour party has kept its cards close to its chest when it comes to revealing what it’ll do with NatWest should it win the election. For potential investors, this unknown is a risk that needs to be considered.

There are also a few other issues too. Falling interest rates will harm its margins. It’s also heavily reliant on the UK for generating revenue, so it’s not as diversified as some of its more international peers.

What I’d do

However, at their current price, I think NatWest shares could be a shrewd buy. Falling rates could mean problems, but they’ll also help shore up the mortgage market. The months ahead may be choppy, but I think the stock is too cheap to ignore.

While a government sale will no doubt influence the NatWest share price, I wouldn’t wait until a potential sale to open a position. By doing so, I could be missing out on gains and extra income.

If I had the cash to invest, I’d happily snap up some NatWest shares today. With the passive income I received, I’d put it back into buying more shares while they look cheap.

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.

Charlie Keough 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.

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