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I’m looking to add some low-cost dividend stocks to my portfolio today. So should I consider buying these FTSE 100 shares? Both carry forward dividend yields north of the 3.7% FTSE average.
NatWest Group
The Bank of England is on course to keep raising interest rates in the months ahead. This will allow banks like NatWest Group (LSE:NWG) to continue making big profits from their lending activities.
Yet I believe the benefit of higher net interest margins (or NIMs) for banks is offset by the prospect that loan growth could sink. I’m also concerned about the prospect of soaring credit impairments as the UK economy flatlines.
Research from UK Finance this week underlined how, for example, the strain is steadily growing on homeowners. This is a huge problem for NatWest specifically given its position as Britain’s second-biggest home loan provider.
UK Finance said that 76,630 homeowner mortgages had arrears of 2.5% of more in quarter one. That was up 2% from the previous three-month period. Meanwhile there were 750 residential repossessions between January and March, a 50% rise from the previous quarter.
The number of homeowners in dire financial straits is tipped to grow strongly as the Bank of England hikes rates further and people come to the end of their fixed-rate deals. Policymakers are now expected to raise rates at least another three-quarters of a percent from current levels of 4.25%.
NatWest shares trade on a forward price-to-earnings (P/E) ratio of 5.7 times. They also carry a market-beating 6.7% corresponding dividend yield. But even at these levels I’m not tempted to invest.
Severn Trent
Water suppliers like Severn Trent (LSE:SVT) are up to their necks in controversy right now. Public uproar over the amount of sewage they are pumping into Britain’s rivers and seas is higher than it’s been for many years.
This week utilities businesses pledged £10bn to tackle the problem, with households due to pick up the bill. The latter point has gone down like a lead balloon and could still prompt action from regulator Ofwat.
But on balance Severn Trent could still be an attractive stock to buy right now. This is because its operations aren’t dependent upon the health of the broader economy. So with UK GDP tipped for prolonged stagnation it could well deliver market-beating returns.
Another advantage for investors is that water suppliers don’t face intense competitive pressures. Households and businesses don’t get to choose who provides the water that flows from their taps.
The same can’t be said for NatWest. The bank is locked in a bloody fight to stop its customers fleeing to new digital-led operators.
Today Severn Trent shares offer a healthy 3.8% prospective dividend yield. They also trade on a low price-to-earnings growth (PEG) ratio of 0.5.
A reading below one indicates that a stock trades below value. I think it could be the rock-solid dividend stock I’ve been searching for.
