Enhanced yield potential

For all of the carnage that a stock market crash causes, there are actually some positives to take from it. One relates to the rise in dividend yields. If we break it down, the dividend yield is made up of the share price and the dividend per share. Logically, if the share price falls but the dividend stays the same, the yield will increase.

Let’s say a stock is trading at 100p with a 5p dividend. The yield is 5%. If a crash causes the stock to fall to 75p, but the dividend stays the same, the yield is now 6.66%. In terms of the change, it’s a 33% boost!

This means that shrewd income investors can pick up dividend stocks that fall during a crash and benefit from this added yield. Of course, if the dividend gets cut in the future due to the company being negatively impacted by whatever caused the crash, that’s a problem. But during a market rout, some stocks fall simply because investors panic. Some firms are unaffected by the cause of the fall but still experience a short-term drop. Those are the stocks to target.

Over the medium term, we could see share prices recover, with dividends remaining unchanged. Of course, there’s no guarantee this will happen, and it ‘ a risk that needs to be acknowledged.

One for the watchlist

If we did see a crash trigger a move lower in most stocks, one that investors could consider is Paragon Banking Group (LSE:PAG). Over the past year, the share price is up 18%, with a current dividend yield of 4.88%.

At a fundamental level, Paragon has been increasing earnings per share and underlying profit, which in turn supports dividend hikes. In its latest fiscal year to September 2025, earnings per share rose by 8.5%, while the dividend increased by 8.7%. As a result, it leads me to conclude the divdiend is sustainable as it’s growing in line with profits.

Although the specialist lender has flagged that recent customer activity has reflected broader uncertainty, I think this will ease in 2026. The latest government Budget hasn’t been as negative as some thought it would be for some of Paragon’s key client groups, such as landlords. If interest rates fall further this year, it could help to kickstart more demand for loans from both landlords and more commercial clients.

In terms of risks, the ongoing FCA investigation into the sector-wide car financing scandal could hurt Paragon. It recently increased the provision set aside for claims to £25.5m. But this could rise in the future depending on what gets decided.

Even with this, I think if a market crash happened surrounding something that didn’t materially impact Paragon, any sell-off could make it an income stock to consider for investors.

The post Here’s how a stock market crash could boost passive income potential by 33% appeared first on The Motley Fool UK.

However, it doesn’t mean these types of shares don’t exist. Here are two I’ve noted down.

A specialist bank

The first one is Paragon Banking Group (LSE:PAG). The company’s up 18% over the past year and 81% over the past five, ticking the box for a growing enterprise. On the dividend side, it currently has a yield of 5.08%.

The FTSE 250 firm mostly focuses on UK mortgage lending. More specifically, buy-to-let mortgages for landlords and specialist commercial lending for companies. However, it also has a large deposit book, thanks to offering savings accounts to the retail crowd.

It therefore makes money by lending funds at a higher interest rate than it pays on deposits, known as the net interest margin.

Back in December, it released preliminary full-year results showing growth is coming from the loan book, while also keeping a close eye on costs. The CEO also spoke about how digitisation has helped the firm become more efficient. When looking at 2026, he said: “We see plenty of opportunity ahead in our chosen specialist markets”.

The dividend per share rose 8.7% last year, and I don’t see any risk of it being cut any time soon. However, one risk is that given its niche areas of lending, it might struggle to keep growing at the same pace in the future, as the market size is naturally capped.

The investment giant

Another stock is Man Group (LSE:EMG). The global investment management firm has a dividend yield of 5.46%, with the share price up 19% in the last year.

The company has strong momentum right now, thanks to assets under management (AUM) hitting a record high in the latest results from October. Specifically, the firm now manages $213.9bn, up from $193.3bn in the previous quarter. This is important because asset managers charge fees based on the amount of money they manage. So this bodes well for revenue increasing in the coming reporting periods.

Part of what’s attracting investor attention for Man is the expansion of the different funds it’s offering to clients. It’s now pushing new actively managed ETFs, as well as private credit solutions. This diversification of strategies not only helps the company to reduce risk in one area, but also makes it more appealing to outside investors.

On the dividend side, it pays out twice a year, with the amount ticking higher over the past few years. The dividend cover ratio is 1.8, so the earnings per share can almost cover the current divdiend twice over!

One concern is that the stock’s slightly at the mercy of the financial markets. If we get a market crash, the business will underperform, potentially prompting clients to pull their money.

Overall, I think both companies can offer investors the best of both worlds and could be considered as part of a broader portfolio.

The post The best of both worlds? 2 growth stocks with dividend yields above 5% appeared first on The Motley Fool UK.

It now trades at 12.5 times expected earnings for 2025 and 9.7 times projected earnings for 2026. At points three years ago, it traded below half of these figures.

Lloyds remains an interesting investment opportunity, and I believe investors should give it their consideration. However, from a valuation perspective, I believe investors may find better value elsewhere.

So, what stocks constitute better value?

Arbuthnot

This first is one I’ve spoken about several times before. It’s private bank Arbuthnot (LSE:ARBB). The appeal lies in its valuation. It trades at 8.1 times forward earnings and this is forecast to fall to 6.8 times in 2026.

This suggests that there’s room for a re-rating. This is when the market changes its opinion on a company, causing its price multiple, like the price-to-earnings (P/E) ratio, to change significantly without a corresponding change in the company’s actual earnings. 

What’s more, its dividend yield is actually stronger than Lloyds by some distance. The forward dividend yield is expected to sit at 5.9% before rising to 6.4% in 2026. In other words, a £10,000 investment today could deliver more than £1,200 in dividends over the next two years.

Concerns centre around two things. Firstly, the spread between the buying and selling price. With a £10,000 investment, an investor could be down £350 before they’ve even owned the stock for five minutes.

The second is the size. It’s much smaller and therefore there’s concern about the bank’s liquidity or ability to cope in a crisis. I do think this could be overdone. It’s deposit-to-loan ratio is also very conservative.

Private banking could also be an interesting growth industry. Arbuthnot’s Bristol office has been open less than a decade but the balance sheet could top £1bn in the coming years. That’s just one office.

In short, it’s certainly worth pondering.

Paragon

Who’s next? Paragon (LSE:PAG) is another smaller bank, this time known for its focus on specialist mortgages, consumer loans, and buy-to-let (BTL) lending. It’s built a reputation for being a fairly dependable dividend player, and dividend payments have really surged in recent years.

Shares have come off their highs in recent months and that’s made the valuation look rather appealing. It now trades at 7.6 times forward earnings, set to fall to 7.1 times in 2026, according to the forecasts.

Meanwhile the dividend yield sits at 5.4%, rising to 5.8% in 2026. Both strong numbers and considerably above Lloyds.

On the qualitative side, credit-rating agency Fitch Ratings highlights its “consistently strong asset quality … pricing power within its specialist BTL niche”. 

However, there are risks. Its reliance on the BTL and commercial property books leaves it vulnerable to changes in regulation, taxation, interest rates, and landlord sentiment. And let’s face it, the Chancellor isn’t easy to second guess at the moment.

All considered, I certainly believe this is one for the watchlist.

The post As the Lloyds share price skyrockets, what are the alternatives? appeared first on The Motley Fool UK.

But while it’s led the FTSE 100 pack, two regional FTSE 250 players are actually ahead.

Close Brothers Group’s (LSE: CBG) jumped 17.73% this month, while Paragon Banking Group‘s (LSE: PAG) up 5.95% (as of 28 August).

That begs the question: do these smaller lenders offer the same long-term value as Lloyds? I decided to take a closer look.

Flying too close to the sun

Close Brothers has been one of the most remarkable performers of 2025, with its share price almost doubling year-to-date. The specialist financial services group provides lending, securities trading and investment management solutions across a range of sectors.

Much of the recent rally came after the Supreme Court overturned previous rulings on car loan sales practices. That decision lifted a cloud hanging over several banks – Lloyds included – and helped spark investor enthusiasm.

As a result of a one-off provision of £165m put aside, Close Brothers posted a loss in its latest results. However, it’s now unlikely that the full amount will be needed so this loss will likely adjust in the next earnings call.

Still, it remains vulnerable to economic downturns, regulatory changes and competitive pressures. While it does well in stable conditions, it could face headwinds in a weaker economic environment.

To be fair, the stock does look cheap on paper, trading on a forward price-to-earnings (P/E) ratio of 8.2 and a price-to-book (P/B) ratio of just 0.47. Yet some analysts believe the good news is already priced in. RBC Capital Markets recently downgraded the stock to Sector Perform, keeping its price target at 525p.

The risk, in my view, is that Close Brothers may struggle to justify the recent surge if profitability doesn’t follow.

A reliable income stock

Paragon Banking Group, on the other hand, offers a steadier story. Known for its focus on specialist mortgages, consumer loans, and buy-to-let lending, the bank has built a reputation as a dependable dividend payer. It currently yields 4.6%, backed by a 20-year history of payments and a payout ratio of around 40%.

Valuation looks undemanding too, with a forward P/E ratio of 8.6 and a P/B ratio of 1.2. Importantly, Paragon’s profitable – it boasts a 21.5% operating margin and a return on equity (ROE) of 14.7%. In its Q3 trading update, loan balances rose 4.8%, underlining steady business growth.

Broker sentiment remains cautious but constructive. On 26 August, Jefferies issued a Hold rating with a target of 1,015p, while the broader analyst consensus sits at around 1,000p – implying a potential 12% increase from today’s price.

My verdict

Despite outperforming Lloyds this month, Close Brothers has still shed 58% of its value over the past five years. But this year’s recovery has rewarded shareholders handsomely, so it’s starting to look like a promising stock that’s worth considering.

Paragon, in some ways, looks even more attractive. For income investors seeking a reliable and fairly valued opportunity, it seems like a stock worth considering. Lloyds may remain the UK banking heavyweight but, on balance, I think Paragon deserves a place on any watchlist.

The post Lloyds’ share price beat all FTSE 100 banks in August — but 2 FTSE 250 peers are still ahead appeared first on The Motley Fool UK.

A strong contender

I’m referring to Paragon Banking Group (LSE:PAG). It’s not exactly tiny but is a small bank compared to Lloyds, based on the difference in market cap. Paragon has a capitalisation of £1.72bn, whereas Lloyds is at £47.2bn. Quite a difference!

Yet Paragon has been performing very well this year, for several reasons. One factor is the area where it makes the most money. It primarily focuses on generating revenue through lending activities, including buy-to-let mortgages and commercial lending. In targeting niche borrowers (such as portfolio landlords), it can obtain business that high street banks like Lloyds often underserve.

Financial results show that this is working. In the latest half-year report, it said that “underlying earnings per share increased 9.6%, supported by strong loan growth and a 25.1% increase in new mortgage lending.”

Another reason for the share price move has been the resilience in the net interest margin. This is a key figure for the bank, and measures the difference between what a bank pays out on savings and charges for loans. The latest results showed it’s currently at 3.13%, virtually unchanged from the 3.14% at the end of 2024. If this metric can continue to remain around this level through to the end of the year, it should further provide investor optimism for substantial full-year profits.

The party might not be over

Some investors will acknowledge the recent performance, but point out that over a one-year time horizon, Lloyds shares are up 31% versus Paragon at 8%. This is true, but in some ways, it suggests to me that Paragon could have further room to grow in the future.

For example, the price-to-earnings ratio for Paragon is much more reasonable. At 8.65, it’s below the fair value of 10 I use. If anything, it’s still undervalued. Yet the same ratio for Lloyds sits at 12.57. I’m not going to say that Lloyds is overvalued on this factor alone, but it goes to show that for investors wanting a bank that could be undervalued, I know which one I’d prefer to consider.

At the same time, there are company-specific risks to be aware of. One concern is that some of the revenue increase from earlier this year was driven by people rushing to beat changes in stamp duty thresholds that came in at the start of April. Therefore, it might not reflect sustainable demand going forward.

Even with this, I believe the outlook for the bank is strong, and so feel investors should consider it for their portfolios.

The post This small FTSE bank has been smashing Lloyds shares over the past 6 months appeared first on The Motley Fool UK.

Generous dividend cover

First is Paragon Banking Group (LSE:PAG). The stock is up 24% over the last year, with a dividend yield of 4.26%. It’s a UK-based specialist banking and financial services company that focuses primarily on lending and savings products. Therefore, the main way it generates revenue is through the spread between the interest it earns on loans and mortgages (by charging higher rates to borrowers) and the interest it pays on savings deposits (generally lower rates).

Over the last five years, the dividend per share has grown by an impressive 23.5%. When I see both the dividend increasing and the share price rallying, it’s a strong indication that the company is doing well. Higher profits supported the stock’s upward movement. Due to the increase in earnings, it can afford to increase the money being paid out to shareholders.

Dividend cover is currently 2.4, which bodes well for the future. Any number above 1 shows that the earnings per share completely cover the income being paid out.

One risk is that with a focus on loans, there’s the potential for defaults. If the UK economy really starts to nosedive later this year, the bank could lose money from clients being unable to repay their loans.

Stock and dividend growth

Another option is HSBC (LSE:HSBA). The global banking giant has increased its dividend by 27% over the past five years, yielding 5.27% currently.

Some might be a little concerned, as the dividend was paused during the pandemic. But it was only for a brief period, and was at the request of the financial regulator for all banks. Therefore, I don’t see this as a red flag when considering the bank for income.

Instead, the growth of the dividend has been impressive. The share price has increased by 40% over the last year, making the fact that the yield remains above 5% unusual. Typically, a rising share price acts to lower the dividend yield. Yet, in this case, the increase in the dividend per share has offset this.

I think the bank can continue to pay out good income to investors. HSBC has significant exposure to Asia (particularly Hong Kong and mainland China) where economic momentum is expected to improve as monetary and fiscal stimulus measures support growth. Furthermore, the ongoing cost-cutting initiatives and restructuring efforts are enhancing operational efficiency, which should further boost profits.

Of course, if interest rates get cut in the coming year at a faster pace than expected, this could undermine net interest income. It’s a potential risk to be aware of. Yet, even with this, I think both HSBC and Paragon are passive income options worth investors considering.

The post 2 passive income gems with a 5-year dividend growth rate above 20% appeared first on The Motley Fool UK.

Over the past decade, Paragon has diversified. it now offers a broad range of savings products to retail customers and provides commercial lending to SMEs, including asset finance, structured lending, and property development finance. The group’s business model is built on deep sector expertise and a focus on underserved niches, funding its lending through online personal savings as well as central bank funding.

Is it cheap?

At first glance, it looks relatively good value. Earnings per share (EPS) are expected to rise from 85.2p in 2024 to 114.6p by 2027, a compound annual growth rate of about 10%. That’s pretty strong for a financial business.

As such, the company’s price-to-earnings (P/E) ratio is projected to fall from 9.6 times in 2025 and fall to 7.9 times by 2027, indicating that the market isn’t pricing in aggressive growth but does see solid earnings stability.

The price-to-book ratio (P/B) is forecast to remain between 1.2 times and 1.06 times during the forecasting period. This suggests the stock is trading close to its book value and is a sign of reasonable valuation.

However, Paragon stands out for its consistent and growing dividend. The dividend per share is projected to increase from 40.4p in 2024 to nearly 50p by 2027. This supports a forward yield in the 4.7%–5.5% range, with a payout ratio around 43% of earnings.

This is enabled by improving revenue over time. Net sales are forecast to grow steadily from £496m in 2024 to £540m in 2027, supporting the sustainability of both earnings and dividends.

How does Paragon compare to Lloyds?

I mentioned Lloyds at the start and the table above table highlights Paragon’s more conservative payout and lower valuation in the near term, while Lloyds’ yield becomes more attractive as earnings grow. In fact, Lloyds, despite being a more mature institution, actually offers stronger earnings growth. It’s cheaper at the end of the forecasting period.

Personally, I don’t believe Paragon’s valuation multiples suggest it’s undervalued compared to Lloyds. It actually appears a more conservative option, given the Lloyds growth trajectory. As such, I won’t be adding Paragon to my portfolio in the near term and I don’t think it’s the best one for investors to consider. It’s certainly an interesting prospect, but I’m already well exposed to banks through the likes of Lloyds and would suggest that the high street bank is worth a closer look for anyone looking at the financials sector.

The post Should investors pass on Lloyds shares for this lesser known bank? appeared first on The Motley Fool UK.

With a low P/E ratio of 8.8 and a meaty 5.6% dividend yield, I was intrigued. Either it’s a solid dividend stock with strong earnings… or a crashing share price has pushed the yield up and the P/E down.

I had to find out.

A lender-turned-challenger bank

Paragon Banking Group (LSE: PAG) may seem like the latest in a long line of UK challenger banks. But it’s far from a new player on the market.

Once solely a buy-to-let (BTL) lender, Paragon received a UK banking license in 2014. It now serves over 1.5m customers with £15bn in loans.

Like most challenger banks, it differs from high street banks in that it has no branches. Rather than offer typical savings accounts, it focuses on specialised lending for landlords, SMEs and commercial equipment.

CEO Nigel Terrington has helmed the bank for almost 20 years, having initially helped it navigate the early 90s recession. Having held the position so long speaks volumes to his commitment — but how has the bank fared in that time?

Slow and steady growth

Surviving both the 90s recession and the 2008 Financial Crisis, Paragon’s made steady progress. It’s up 77.6% in the past decade, equating to annualised growth of 5.93%. It recovered rapidly after Covid, climbing from £2.57 a share to a five-year high of £8.03 last month (6 December).

But past performance is no indication of future results. If the housing market slips, mortgage lenders could take a hit. Even mildly rising interest rates could put significant pressure on the company’s profits.

What’s more, it’s facing up against the big boys like Lloyds and NatWest. Specialist lenders have a place but the growth potential’s limited. During tough economic times, consumers tend to prefer established brands over lesser-known ones.

What’s the alternative?

When assessing a stock, it’s equally important to look for reasons NOT to buy it, rather than vice-versa. One of the key reasons not to invest in one stock is the potential to better allocate capital elsewhere.

Looking at the UK’s diversified finance sector, one key competitor sticks out: OSB Group. Like Paragon, it offers BTL and commercial mortgages in the UK along with additional services like savings accounts.

Both share similar market-caps (£1.5bn) and profit margins (40-50%) but OSB enjoys considerably higher revenue and earnings. It also has a slightly higher 10-year annualised growth rate of 6.4%.

Most notably, OSB has a lower P/E ratio (3.8) and a higher dividend yield (8.3%). Given that those were my initial criteria, it seems OSB’s the obvious choice. 

However, the share price is down 20% in the past six months leading to the inflated yield. What’s more, it has a short dividend history, limiting any assurance of future payments.

Final thoughts

Despite the lower yield, Paragon may be more reliable for dividends. That said, it offers fewer diversified products, leaving it more exposed to the housing market.

Overall, with strong earnings growth and a history of stable management, I think it’s a stock worth considering. I’m not currently looking to diversify more into finance but it’s certainly one I’ll keep an eye on.

The post This FTSE 250 stock has a P/E ratio of 8.8 and a 5.6% yield! Should I be interested? appeared first on The Motley Fool UK.

An alternative banking choice

The first stock I’m thinking about is Paragon Banking Group (LSE:PAG). The bank’s an alternative to the major FTSE 100 household names, although this isn’t a small firm by any means. The company’s in the FTSE 250 and has a current market-cap of £1.57bn.

Over the past year, the stock’s risen by 63% yet the dividend yield‘s still above average at 5.15%. The latest results for fiscal H1 2024 showed a jump in profit, with factors including “good loan growth, improved margins and tight cost control”. This allowed it to increase the dividend per share payment by 20% versus the same period last year.

As the business is growing, it’s diversifying risk across different divisions. For example, it’s making a push towards commercial lending, with this making up 48% of total lending for H1 2024. I think this is a smart move, as being too exposed to retail customers can be a risk.

One concern is the fact that cuts to the base interest rate will reduce the profit margin it makes on loans and deposits. However, this is a factor that all those in the banking industry will have to deal with going forward.

Getting real with real estate

Another idea is Sirius Real Estate (LSE:SRE). Also in the FTSE 250, the real-estate investment trust (REIT) owns a portfolio of business parks, offices and mixed-use workspaces in the UK and Europe. The stock’s jumped by 11% over the past year.

Due to its REIT status, the Sirius management team has to pay out a certain amount of profits as a dividend to shareholders. For the past few years, it’s paid out two dividends a year, equating to a current dividend yield of 5.38%.

The latest business update showed a 86.2% occupancy rate in the UK, spread across 3,739 tenants. These range from blue-chip companies to SME’s. I like the fact that it has a broad range of clients. It means even if it loses a couple, or if one particular industry suffers, it shouldn’t have a materially negative impact.

Looking forward, I’m optimistic about commercial property coming back into vogue. I’m hearing about more and more firms looking to enforce a stricter office working policy and moving to a more hybrid work from home stance. This should keep tenant demand high for Sirius.

The net debt-to-EBIDTA level is 5.6 times. This is high, in my view, and could be seen as a risk. The management team needs to keep a close eye on this.

I like both ideas, but think Paragon just edges it for me. I’m seriously thinking about investing the £300 for October in that one.

The post With a spare £300, here are 2 top dividend shares I’m thinking of buying now appeared first on The Motley Fool UK.

But it doesn’t come easy.

Earning money usually requires time and effort, but for passive income, it’s possible to replace the effort with savings. In other words, investing in dividend stocks and compounding the returns.

The magic combination

Dividend stocks regularly pay out a percentage per share. Reinvesting these payments can create a snowball effect of wealth accumulation.

There are plenty of dividend-paying stocks on the London Stock Exchange but not all are equal. In addition to a high yield, it’s important to choose stocks with a strong value proposition and track record of payments. 

Investment trusts or income shares are a good option as they typically pay a reliable dividend. However, they usually have limited growth potential. The real diamond in the rough to look for is an undervalued share with a long history of consistent dividend payments.

A lesser-known specialist bank

One good example, I feel, is Paragon Banking Group (LSE:PAG), the specialist lender and savings bank.

But investments come with some risk and this one is no exception. Much of its daily operations involve debt, which is normal for banks, but also something to check. With £3.13bn in debt and only £1.4bn in shareholder equity, its debt-to-equity (D/E) ratio is worryingly high at 221%.

Yet it’s reduced its debt position significantly in the past 10 years, but an ideal D/E ratio would be below 100%. Growth has also slowed recently, with profit margins down from 73% to 39% this year. And earnings are forecast to grow by only 4.3% this year — a fair bit lower than the industry average of 14.7%.

So why do I like it as a dividend stock?

This £1.6bn FTSE 250 constituent sports a slightly-above-average dividend yield of 5%. While there are certainly many stocks that pay higher dividends, I like Paragon’s track record and growth potential. 

Other than a brief pandemic break, it paid a regular bi-annual dividend, which has increased from 7.8p to 37.4p in just 10 years. If the dividend continues to increase at this rate (which won’t necessarily happen), it will be paying over £1 per share in the next 10 years.

What’s more, the shares are estimated to be undervalued by 53% using a discounted cash flow analysis. That leaves a lot of room for growth.

Calculating returns

The Paragon share price hasn’t done much in the past 20 years. But in the past four years since Covid, it’s done very well. Since May 2020, it’s up 130%, with annualised returns of 23%. 

Of course, past performance doesn’t indicate future results, but I think the UK stock market average of 7% a year is a good benchmark.

An initial investment of £1,000 combined with a £300 monthly contribution could build a pot of £4,720 in one year.

By reinvesting the 5% dividends and continuing the monthly contributions, this could grow to £295,980 in 20 years. Taking into consideration the increasing dividend, it could be paying out £16,000 in annual dividends.

That’s in no way guaranteed, of course, but it’s a decent bit of spare cash each month!

The post With as little as £300 a month invested, this stock could net £16,000 a year in passive income appeared first on The Motley Fool UK.