We recently compiled a list of the U.K. Dividend Aristocrats List: 2024 Rankings by Yield.In this article, we are going to take a look at where NatWest Group plc (NYSE:NWG) stands against the other U.K. dividend aristocrats.
In recent years, investors have turned away from UK equities, opting instead for global stocks, particularly high-growth options like US technology companies. The UK stock market is contracting at its fastest rate in over a decade, driven by takeovers of London-listed companies. According to Bloomberg data, approximately 45 companies have been delisted from the London market this year due to mergers and acquisitions, representing a 10% increase compared to the total for last year. This marks the highest number of delistings since 2010. Meanwhile, the value of deals targeting UK companies has surged by 81% this year, exceeding $160 billion.
Earlier this year, UK equities seemed to be experiencing a shift in sentiment among both large institutions and smaller investors. The British stock market continues to attract bargain hunters, as UK equities are now trading at a record discount of over 40% compared to global counterparts, based on Bloomberg data. Many of the takeover targets have been mid-cap companies listed on London’s AIM market, which typically feature low trading volumes and limited analyst attention.
That said, in November, investors returned to UK equity funds after three and a half years of consistent monthly withdrawals and a significant sell-off ahead of the Budget. Data from Calastone shows that retail investors directed a net £317 million into funds focused on UK stocks during the month. This inflow marks a notable shift, ending 41 consecutive months of net outflows, during which over £25 billion was withdrawn since May 2021.
The change in investor sentiment follows a challenging October for equity funds, which experienced record outflows as UK investors withdrew their money due to fears that the chancellor would raise capital gains tax (CGT). At the end of October, during the Budget announcement, Chancellor Rachel Reeves confirmed an immediate CGT increase. The lower rate rose from 10% to 18%, while the higher rate climbed from 20% to 24%.
Analysts suggest the UK stock market could be nearing a recovery, but the timing and pace of this turnaround remain uncertain. This is where dividend stocks play a key role. Prioritizing stocks with rising dividends can offer stability and consistency through different market cycles. In addition, they provide an opportunity for long-term growth, compounding returns over time until share prices rebound. The UK market offers one of the highest dividend yields among major markets. The FTSE 100 boasts a yield of 3.68%, while the FTSE 250, representing medium-sized UK companies, offers slightly lower yields but still provides attractive income opportunities. This allows investors to focus on higher-growth areas, such as smaller companies, while benefiting from increasing dividends. According to a report by BlackRock, currently, UK market dividends are growing at a rate of 2-3%, roughly in line with long-term inflation. Stocks with growing dividends typically have reliable cash flows, enabling them to increase payouts over time.
Janus Henderson’s 2023 annual dividend report confirmed the rise in dividend growth, noting that the UK distributed approximately $86 billion in dividends in 2023, a notable increase from the $63.1 billion paid out in 2020. Given this, we will take a look at some of the best FTSE dividend stocks according to yield.
Our Methodology:
For this list, we scanned over 40 holdings of the UK Dividend Aristocrats ETF, which tracks the performance of the highest-yielding UK companies with at least 7 consecutive years of dividend growth. From this list, we chose 10 stocks with the highest dividend yields as of December 28 and arranged them in order from lowest to highest yield. We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 900 as of Q3 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A person using a laptop to access a bank’s online banking system.
Dividend Yield as of December 28: 4.43%
NatWest Group plc (NYSE:NWG) is a retail and commercial bank, headquartered in London. The company offers mortgages, loans, credit cards, and related services. The stock has surged by nearly 84% in the past 12 months, outperforming the FTSE 100. Much of the company’s success over the past year can be attributed to the unusually high interest rates, enabling the bank to secure exceptionally strong returns on its loans. In 2024, the bank consistently maintained its net interest margin—the gap between interest paid and interest earned—above 2%.
In the third quarter of 2024, NatWest Group plc (NYSE:NWG) reported an attributable profit of £1.17 billion and a return on tangible equity (RoTE) of 18.3%. Customer deposits, excluding central items, rose by £2.2 billion, with growth across all three business sectors, primarily driven by increased savings. For 2024, the company expects to maintain a return on tangible equity above 15% and anticipates income, excluding notable items, to reach approximately £14.4 billion. In addition, total income, excluding notable items, amounted to £3.77 billion, marking an increase of £182 million, or 5.1%, compared to Q2 2024. This growth was primarily driven by lending and deposit expansion, along with margin improvement.
L1 Capital also highlighted this in its Q3 2024 investor letter. Here is what the firm has to say:
“NatWest Group plc (NYSE:NWG): NatWest is the largest commercial lender in the U.K. (20% share) and the second largest U.K. retail bank with ~13% of all mortgages. We see NatWest as best positioned in the U.K. Banking sector to benefit from improving margin trends, with topline growth supported by a rebound in U.K. housing and economic activity. Moreover, with significant buybacks owing to a strong capital position, NatWest should see ~8% EPS growth p.a. over the next three years vs. ~2% expected growth for CBA. Although CBA enjoys a more dominant market position in Australia vs. NatWest in the U.K., it appears overvalued in our view as it trades on ~24x FY25 P/E (historical highs) compared to only ~7x for NatWest.
NatWest Group plc (NYSE:NWG) currently offers a semi-annual dividend of $0.1543 per share and has a dividend yield of 4.43%, as of December 28. For FY24, the company expects to pay ordinary dividends amounting to approximately 40% of its attributable profit.
The number of hedge funds tracked by Insider Monkey owning stakes in NatWest Group plc (NYSE:NWG) grew to 15 in Q3 2024, from 11 in the previous quarter. These stakes are worth over $33.8 million in total.
Overall NWG ranks 3rd on our list of the U.K. dividend aristocrats. While we acknowledge the potential of NWG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than NWG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
