Image Alt

The Investing Box

  /  Editor's Pick   /  3 UK bank income stocks whose dividends keep growing

3 UK bank income stocks whose dividends keep growing

Smart young brown businesswoman working from home on a laptop

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.

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.

The post 3 UK bank income stocks whose dividends keep growing appeared first on The Motley Fool UK.

Should you buy Barclays shares today?

Before you decide, please take a moment to review this first.

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Claim your free copy now

setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);

More reading

  • Are Barclays shares undervalued? Here’s what the charts say!
  • 3 FTSE 100 shares I think are too cheap to miss!
  • Interest rates increase AGAIN. Here’s how I can profit from the FTSE 100
  • Best British value stocks to buy in August
  • How high could HSBC shares go due to rising interest rates?

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.