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This challenger bank’s 5% dividend yield easily beats Barclays plc

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 KA decade after the financial crisis, Barclays Bank (LSE: BARC) is still in recovery mode, and performance over the last year has been patchy. I still think it is a great long-term buy-and-hold, but it continues to stretch the patience of all but the most far-sighted investors.

Secure option

Rather than investing in this wounded beast, you might prefer to invest in something younger, sleeker and with a more rewarding dividend. Challenger bank Secure Trust Bank (LSE: STB) has just issued its audited final results for the year to 31 December 2017, and investors like what they see. Its stock is up 3.77% at time of writing after it announced increased profits in a year of strategic repositioning.

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The West Midlands-based bank was founded in 1954 but only listed on the stock market in October 2016. It takes savings and lends money to individuals and to businesses but remains a minnow compared to blue-chip behemoth Barclays, with a market cap of £377m against £35bn.

Making money

Secure Trust Bank has none of Barclays’ manifold legacy problems but it is nonetheless in recovery mode, with its share price halving over the last couple of years. That is despite reporting “excellent progress” in 2016 and record profits last year.

Today, it announced group profit before tax on continuing operations of £25m, a 28.9% increase on 2016, as it develops its SME, retail finance and motor lending activities, and launches a mortgages division and new online deposit platform. “The group finished 2017 with strong capital and funding positions and its largest ever pipeline of new business in its chosen markets,” management said.

Time to trust

Secure Trust Bank currently trades at a bargain forward valuation of 9.5 times earnings and offers investors a generous forecast yield of 5.2%, covered twice. Better still, earnings per share (EPS) are forecast to grow 49% this year, and another 32% in 2019. These numbers look highly promising to me.

My fellow Fool Kevin Godbold reckons that Barclays’ performance is too patchy to buy into now, but I believe the bank is due a recovery spurt sooner or later, and it could pay to get in at today’s lowly forecast valuation of just 10.4 times earnings. The outlook should brighten if it can keep its nose clean and keep further fines and penalties at bay, with EPS expected to rise 15% in 2019.

Rising yield

Markets are baffled by stealth investor Edward Bramson’s intentions towards Barclays after he revealed a 5.2% stake in the company on Monday, although his partner Aviva said he will not be pushing for seismic changes such as selling off the investment bank or Barclaycard. Pimco is also building up its stake in Barclays. Maybe you should too.

The ride may be bumpy but that is all the more argument for investing when Barclays is down, rather than up. It still trades 22% lower than five years ago but this makes for a tempting entry point. The stock yields just 1.5% today, but that is forecast to hit 3.5% over the next year, then 3.8% the year after. One day, it might even catch up with Secure Trust Bank.

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Harvey Jones no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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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