A promotion to the FTSE 100 has brought Investec (LSE: INVP) into sharper focus for income investors.
Its diversified model gives it multiple engines of profit growth, from private banking to wealth management. And forecasts highlight rising earnings and higher payouts, meaning the shares offer an intriguing new route to long‑term passive income.
So, how much dividend income are we potentially looking at?
How big are the dividend rises forecast?
Even now, the international banking and wealth management group gives a dividend yield of 6%. That is nearly double the FTSE 100’s present average of 3.1%, in which the stock will be listed from 22 June. And it is also well above the 3.4% average of the FTSE 250, from which it was promoted, although dividend payouts can vary over time.
But things are set to become even better. Analysts forecast the dividend yield will rise to 6.7% next year, 7.3% in 2028 and 8.3% in 2029.
Only a handful of FTSE 100 firms deliver a dividend yield of this scale.
So what does that mean in cash terms?
Investors taking a £20,000 holding in the stock would make £25,736 in dividends after 10 years.
The figure reflects the forecast 8.3% as an average, and the dividends being reinvested in the stock. This process is known as ‘dividend compounding’ and the longer it continues, the bigger the returns can grow.
On the same basis, the dividends would rise to £219,167 after 30 years — the end of the standard investment cycle for long-term investors.
At that point, the total value of the holding would be £239,167. And that would generate a yearly income (just from dividends) of £19,851!
Just how good is the core business?
Underpinning any firm’s dividends — and powering any rises — is sustained profit growth over time. There are risks here for any business, of course, and Investec is no exception.
A downturn in its key markets could weaken client activity and slow earnings growth. High financial market volatility could reduce wealth‑management fees and pressure the group’s overall profitability.
Nevertheless, analysts expect the firm’s profits to grow by a yearly average of 12.9% to end-2029 at least.
Is there any room for price gains too?
Despite its recent promotion to the FTSE 100, there appears to be plenty of value left in the stock.
On the key price-to-earnings ratio, for example, Investec’s 7.8 valuation is bottom of its peer group, which averages 14.4. The firms include ICG at 10.6, Aberdeen at 11, St James’s Place at 11.5, and Man at 24.7.
So, Investec looks very undervalued on this basis.
It also looks cheap at its price-to-sales ratio of 2.5 against its competitors’ average of 2.9. And it looks a bargain too at a price-to-book value of 0.9 compared to its peer average of 2.4.
My investment view
For income‑focused investors, that blend of rising dividends, strong profit growth and clear undervaluation makes Investec a compelling new Footsie entrant to watch.
I already own shares in Aberdeen and Man, so buying another in the same sector would disrupt the balance of my portfolio.
But it is going on my watchlist to buy, should either of those stocks start to underperform.
Should you invest £5,000 in Investec Group right now?
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Simon Watkins owns shares in Aberdeen and Man.
