Back in 2020, banks were told by the UK regulators to pause dividend payments. This was to ensure that the firms had enough cash flow and provisions to deal with whatever might happen as a result of the pandemic. But this is in the past, with most banks turning into valuable income stocks that I think investors should consider right now.
Same sector, different attributes
The three I’m focusing on today are Virgin Money (LSE:VMUK), Barclays (LSE:BARC) and HSBC (LSE:HSBA). Each bank is slightly different, which gives a nice amount of diversification even within the same sector.
Virgin Money is mostly focused on small and medium-sized enterprises (SMEs) and retail banking. The full year runs through to September, with the final dividend due to be announced then. However, on the basis of the quarterly updates, I’d expect it to be a generous one.
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In the Q3 update, it spoke of a “strong capital position” due to good performance. Some of this is being used on £175m of share buybacks, but I’d imagine a bumper final dividend is also in the works.
After tentatively restarting dividends in 2021, last year saw an interim payout of 2.5p and a final dividend of 7.5p. This has grown already in 2023, with an interim one of 3.3p and a final one that I’d expect to be around 10p. The current dividend yield is 6.38%, with the share price up 7% over the past year.
Stalwarts with generous yields
Both Barclays and HSBC are global banks, operating in all areas from corporate banking to institutional capital markets. The main difference is size. Barclays has a market cap of £23bn, HSB’sC is £123bn! When I note the share price performance over the past year there’s another difference. Barclays shares are down 13%, HSBC shares are up 15%.
Barclays has struggled more this year, mainly with operational and control problems. It has also been hit with a slowdown in investment banking, an area it is more dependent on than HSBC.
What impresses me is the current yields on offer. Barclays is at 5.25% and HSBC is 5.42%. This is well above the FTSE 100 average of 3.77%.
Both banks are benefiting from rising interest rates. This is helping to generate more net interest income, which is filtering down to higher net profit. As a result, the dividend per share for both firms has increased since 2021.
Risk but plenty of reward
The main risk I see for the banking sector in the next year is the inflection point with regards to interest rates. I still think the base rate in the UK can continue to rise over the next six months. Yet there comes a point where this really negatively impacts the economy. Loan defaults increase, mortgages can’t be paid and the banks take a hit on this.
As long as the banks can cope with this concern via proper risk management, I think they’re smart buys for income investors looking for growing dividends.
