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RBS’s dividend yield just hit 8%! Here’s why I’d invest £2k

As investors have rushed to sell anything with any exposure to the global economy over the past few weeks, the RBS (LSE: RBS) share price has taken a particularly bad beating.

Shares in the majority government-owned bank have lost nearly 40% over the past month. That’s compared to a loss of 19.2% for the FTSE 100 over the same time frame.

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Following this decline, the stock’s dividend yield has spiked to 8.4%. For me, this looks like an opportunity that’s too good to pass up.

RBS offers value

But RBS has been a challenging investment to own over the past few years. Since the beginning of 2016, an investment of £10,000 in a bank has lost around 30% of its value. The holding would be worth just £7k today, including dividends. The same sum invested in the FTSE 100 would be worth around £12,500 today, a gap of £5,500.

RBS has faced, and overcome, a range of challenges during this period. The bank has completed its restructuring efforts which began in 2009. Its balance sheet is finally in a place where regulators are happy for the company to pay out dividends. What’s more, management is now able to concentrate on growth initiatives.

Unfortunately, despite all of the effort the company and its employees have put in over the past decade, RBS can’t escape the UK economy. And this seems to be why investors have been dumping the stock.

Economic concerns

As one of the largest lenders in the UK, its fortunes are tied to those of the country’s economy. With Brexit, and now the coronavirus, weighing on economic growth, RBS can’t do much to improve investor confidence.

Interest rates are also a problem for the banking group. A key measure of banking profitability is the net interest margin. This is the gap between the bank’s cost of funds, and what it charges lenders to borrow those funds. As interest rates have declined since the financial crisis, its net interest margin has compressed. The Bank of England’s latest rate cut won’t improve the situation either.

Market-beating income

RBS isn’t the only bank suffering. Most of its peers are as well. But where RBS stands out is its dividend yield. As mentioned above, the stock currently supports a dividend yield of 8.4%, and this distribution could increase to 9% next year if regulators allow management to push ahead with the dividend hike.

On top of this, the company is trading at a price-to-earnings (P/E) multiple of 6.4 and a price-to-book (P/B) value of just 0.4. These metrics suggest shares in the bank offer a wide margin of safety levels.

Indeed, a P/B multiple of 0.4 indicates the stock is undervalued by around 100%. As such, if you’re looking for bargains in the current market, it could be worth acquiring a few shares in this undervalued lender.

It might take some time for investor confidence to return. But when it does, there’s a good chance the stock could double from current levels. On top of this, there’s also that 8.4% dividend yield to look forward to while you wait.

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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.