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Forget the Santander share price! This 6.8% yielder could top up your State Pension

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Shares in Spain’s largest bank, Banco Santander SA (LSE: BNC), have fallen by 20% so far this year. Why is this?

One explanation I’ve seen is that rising US interest rates are causing borrowing costs to rise, putting pressure on bank margins and household finances. It’s certainly true that the slump in banking shares hasn’t been restricted to Santander. Most UK and European banks have also seen their share prices fall.

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As a shareholder, I’m still fairly bullish about the outlook for Santander. I believe it could be a good choice if you’re looking for dividend stocks to top up your state pension payments.

Despite this, there’s clearly a risk that my timing is wrong. So I’m also going to look at a mid-cap UK stock with a tempting 6.8% yield.

Long-term growth

One of Banco Santander’s main attractions for me is the group’s geographic diversity.

During the first half of this year, the bank’s attributable profit rose by 4% to €3,752m. Around 44% of this came from Latin American countries, mainly Brazil. A further 14% came from the UK, with 35% from the EU and 7% from the USA.

This heavy exposure to Latin America presents good opportunities for long-term growth, in my opinion. It also provides useful diversification away from the slow-growing EU and UK economies.

I’d keep buying

City analysts expect Santander’s earnings per share to rise by about 22% to €0.48 per share hit year. In 2019, a more modest gain of 8% is expected.

These forecasts put the stock on a 2018 forecast P/E of 8.8, with a dividend yield of 5.2%. With tangible asset backing worth 367p per share, I still think this bank should be a buy at 385p.

This 6.8% yield could be a better choice

Another sector that’s out of favour at the moment is insurance. I’ve written about some opportunities in this sector in recent weeks, but today I want to consider a new choice.

Motor insurer Sabre Insurance Group (LSE: SBRE) has been trading in various forms since 1982, but only arrived on the London Stock Exchange at the end of 2017. Sabre’s share price has remained largely unchanged since then. But we have learned more about this business over the last eight months.

In 2017, the group’s gross written premium (similar to revenue) rose by 7.1% to £210.7m. Underwriting profit rose by 5.5% to £59m, although investment losses meant that adjusted after-tax profit fell slightly to £53.3m.

The group’s profits remained stable during the first half of 2018, when adjusted after-tax profit rose by 11% to £26.1m. Chief executive Geoff Carter warned that the market “has entered a phase of weaker pricing”, but he expects the group’s specialist focus on drivers who attract higher premiums to provide some protection from the competition.

Spare cash

An increase in the group’s solvency ratio to 179% means that this regulatory measure is now above the company’s upper target of 160%. As a result, Mr Carter expects to be able to pay a special dividend later this year.

Sabre shares have dipped slightly today, following the sale of an 18% stake in the company by the group’s former private equity owner.

I don’t see this as a major concern. Indeed, I’m tempted by the group’s high level of profitability. Trading on 13 times forecast earnings and with a prospective yield of 6.8%, I’d rate Sabre as a buy.

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Roland Head owns shares of Banco Santander SA. 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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