FTSE 100 banking giant NatWest (LSE: NWG) is rarely seen as a leading income share prospect by investors. But it has proven to be one for me and looks set to generate even more, as earnings keep rising.
That should also drive rises in the share price. And given how low that is compared to its ‘fair value’, the gains here could be stunning.
So what sort of returns am I looking at overall?
How much second income?
Analysts forecast that NatWest’s current 4.8% dividend yield will jump to 5.6% this year, 6.3% next year, and 6.9% in 2028. These far outstrip the current FTSE 100 average of 3.1% and the FTSE 250’s 3.4%.
So, another £20,000 investment from me in NatWest on the forecast 6.9% as an average would make £19,796 in dividends after 10 years. This also factors in the returns being reinvested into the shares to take full advantage of dividend compounding.
Over 30 years — the standard investment cycle for long-term investors — this figure would increase to £137,560. Including the £20,000 initial investment, the holding would be worth £157,560 by then.
And that would deliver a yearly second income of £10,871!
How much potential price gain?
Price and value are different things in shares. Price is whatever short-term number buyers and sellers agree to trade at any given moment. But value reflects the long-term fundamentals of the underlying business.
The gap between these two measures can be the source of huge profits over the long run. That is because share prices tend to converge to their ‘fair value’ over time.
The best way I have found to determine any stock’s fair value is discounted cash flow analysis. This uses long-term cash flow projections for the business and then discounts them back to today. It produces a per-share value.
Discount rates can vary among analysts sometimes, which can generate different outcomes. But my DCF modelling — using an 8.4% rate — shows NatWest shares are 48% undervalued at their current £6.78 price.
That implies a fair value of £13.04.
So, if share prices keep converging to their fair value over time, the initial £20,000 would be worth £38,468!
What’s the earnings growth forecast?
Consensus analysts’ forecasts are that NatWest’s earnings will increase by a yearly average of 4.7% to end-2028 at minimum.
A risk here is intensifying competition in the sector, which could compress its margins. Another is a weakening economy that could drive up loan defaults and raise impairment charges.
Nevertheless, the analysts’ projections of solid growth ahead look well supported by recent results.
For example, its full-year 2025 numbers saw profit before tax soar 24% year on year to £7.71bn. Income jumped 13% to £16.64bn, while return on tangible equity — the key profit marker for banks — surged to 19.2% from 17.5% in 2024.
My investment view
I buy NatWest shares for both its dividend income potential and its share price potential.
Both prospects together just look too good to pass up, so I will be adding to my holding very soon.
I have also spotted a similar combination in a couple of other stocks in different sectors very recently.
Should you invest £5,000 in NatWest Group Plc right now?
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Simon Watkins owns shares in NatWest.
