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What Dividend Hunters Need To Know About Royal Bank of Scotland plc

Today I am looking at whether Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) is an appealing pick for those seeking chunky dividend income.

DAS cancellation gives hope to income hunters

Royal Bank of Scotland has of course not shelled out a dividend since 2008, as the effect of the crippling credit crunch smashed the balance sheet and forced part-nationalisation of the bank. But developments last month have led to speculation that the bank could be on the cusp of getting back on the dividend trail sooner rather than later.

The business announced in April that it had agreed to pay the Treasury £1.5bn to cancel the ‘Dividend Access Share’, or ‘DAS’, implemented as a condition of the firm’s original bailout. The rule, officially given the green light by European regulators last month, gave preferential dividend rights to the government and stopped the firm doling out payments to private investors.

rbsStill, those seeking bumper income flows from their investment portfolio are likely to remain disappointed. According to broker consensus, Royal Bank of Scotland is set to get dividends moving again from this year, when a full-year payout of 0.1p per share is expected.

This is expected to move much higher next year, to 1.4p per share, although this figure still leaves the yield at negligible levels — a reading of 0.4% for 2015 rises from 0.1% for this year, but it will still drastically lag a forward average of 3.2% for the FTSE 100 as well as a corresponding yield of 3.1% for the complete banking sector.

Following last month’s agreement to retire the DAS, bank chief executive Ross McEwan noted that the move was “a vote of confidence in the progress we have made in rebuilding RBS and in our plan for the bank’s future.”

But I believe that April’s decision was basically an administrative step in Royal Bank of Scotland’s journey back to full-privatisation, and that investors should not expect sizeable payouts any time soon.

A pre-tax loss of £8.2bn in 2013, worsening from £5.3bn the previous year, showed that the bank’s restructuring drive continues to flail. With heavy divestments undermining Royal Bank of Scotland’s long-term earnings — and consequently dividend — outlook, and a multitude of legal issues also looming, I reckon that far more lucrative payout picks can be found elsewhere.

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Royston does not own shares in Royal Bank of Scotland.