When the discussion of dividend-paying banking stocks comes up, most investors think of names such as Lloyds Banking Group and HSBC Holdings.
However, profitability at some of the nation’s challenger banks is thriving, and several of these banks are now rewarding their shareholders with healthy dividend payments.
Take OneSavings Bank (LON: OSB) (OSB.L) for example.
Over the last three years, OneSavings Bank has paid out dividends of 3.9p, 8.7p and 10.5p, equating to a compound annual growth rate (CAGR) of an incredible 39%.
City analysts currently forecast dividend growth of 30% this year, and 23% the year after, resulting in dividend payouts of 13.6p and 16.7p per share. At the current share price of 383p, those payouts equate to forward looking dividend yields of 3.6% and 4.4%.
OneSavings Bank is expected to generate earnings per share of 46.8p this year, giving dividend coverage of a healthy 3.4 times. That earnings figure also places the bank on a low forward looking P/E ratio of 8.2, which seems very reasonable for a company that has more than tripled its revenues over the last three years. The bank said in May that it remains confident of achieving “at least mid-teens net loan book growth in 2017.”
Of course, the challenger banks aren’t without their risks. With OneSavings Bank having exposure to buy-to-let mortgages, residential mortgages and personal loans, profitability could suffer in the event of an economic downturn or property market collapse. It’s also worth noting that the share prices of the challenger banks are generally more volatile than those of the larger banks. Look what happened after the Brexit vote last year – OneSavings Bank’s share price fell dramatically, by almost 50%.
However, in my opinion, there’s attractive opportunities in this sector for those with a long-term mindset. OneSavings Bank is a dividend stock that I’m going to be keeping a close eye on.
Disclosure: Edward Sheldon, CFA has no position OneSavings Bank.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.