Despite the NatWest share price rising 58% in a year, the stock’s still yielding 4.8%

On 7 August, the NatWest Group (LSE:NWG) share price went ex-dividend. This means those holding the bank’s stock before this date are entitled to receive the interim dividend of 9.5p a share, which was paid today (12 September). Add this to the final payout for 2024 of 15.5p and the stock’s yielding an impressive 4.8%. This puts it in the top fifth of FTSE 100 dividend shares.

As an added bonus, the stock’s now changing hands for 2.3% more than just before it went ex-dividend. It’s a win-win for shareholders.

More to come

However, analysts are predicting things will get even better for income investors. Over the next three years, they’re expecting dividends of 29p (2025), 32.7p (2026) and 36.5p (2027). If they’re right, this pushes the forward (2027) yield up to an impressive 7%.

They’re also predicting share buybacks of around £1.6bn-£1.7bn a year. Although — to be honest — if I was shareholder, I’d rather have the cash in my hand. However, for its above-average payout, income investors could consider the shares.

But there are never any guarantees when it comes to dividends, especially in the banking sector where earnings can be volatile.

A doubled-edged sword

Although higher interest rates are, generally speaking, likely to improve NatWest’s net interest margin, they also create another potential problem.

Higher borrowing costs increase the risk of loan defaults and losses to the bank. And with its exposure to the domestic economy – at the end of 2024, 90% of its loans were to UK individuals and businesses – it would be particularly vulnerable to an economic downturn here.

The potential impact of this can be seen by comparing the impairment charges in its 2020 and 2024 accounts. In the first year of the pandemic, the bank increased its provision for bad loans by £3.2bn. Last year, it booked a cost of £359m. Okay, I’m not predicting anything as bad as five years ago, but any slowdown in the economy is likely to have an impact on the bank’s earnings.

Also, its profit could be further damaged by the imposition of a windfall tax — or other levy — as it looks as though the chancellor needs to find additional sources of revenue to balance the nation’s books. We won’t know until November whether Rachel Reeves decides to follow the advice of a number of prominent think-tanks and pressure groups. But it remains a risk.

Not cheap

When it comes to valuation, NatWest has the second-highest price-to-earnings ratio of any FTSE 100 bank. Its price-to-book ratio is the joint highest. This is a concern to me — especially given its reliance on the UK – which means I’m not interested in taking a stake at the moment.

Although I like the bank’s generous dividend, I fear the recent share price rally – it’s up 58% since September 2024 and it’s risen 375% over the past five years – means it’s no longer the bargain it once was.

Personally, I think there are better opportunities elsewhere.