Brexit blow 

The Lloyds share price has been repeatedly tipped (including by me) to stage a share price comeback, but it continues to flounder. It’s fallen another 13.5% in the past three months, as Brexit fears bite and concerns grow that the global economy is slowing, which could drive interest rates back down again.

Lloyds still tempts me as it offers an incredibly attractive forecast yield of 6%, covered 2.2 times by earnings. By 2020, City analysts believe that could hit 6.4%. Lloyds is now the dividend machine of yore.

Bargain buy

Today, you can buy it at a forward valuation of just 7.5 times earnings, which puts it deep into bargain territory. A price-to-book value of 0.8 only adds to what looks like an incredibly strong buy case for the £40bn FTSE 100-listed high street banking fixture.

Yet still Lloyds stock falls. Stagnating interest rates make it hard to widen net interest margins and boost profitability, while the slowing global economy threatens a rise in bad debts and impairments.

Boris question

A lot depends on whether new PM Boris Johnson can deliver on his promises, as do so many things. A no-deal Brexit, vote of confidence, or new general election would all menace the UK economy and banking sector. Although that might also be a buying opportunity for contrarian long-term investors.

Edward Sheldon says Lloyds also faces competition from the new breed of challenger banks, as do all the high street monoliths, but he can’t resist that dividend either.

Still life in buy-to-let

One of those challengers is Paragon Banking Group (LSE: PAG). Its stock is up 1.5% today after its trading update for the nine months to 30 June showed “strong new business growth and margin improvements,” in the words of CEO Nigel Terrington. He said the group has delivered in line with expectations and “is well placed to deliver our 2019 objectives.”

The Paragon share price is up 62% over three years, despite stagnating lately, and Brexit won’t have helped here. Today it reported a 20% rise in year-to-date lending to £1.9bn, with continued improvements in net interest margins. Total deposits have now topped £6bn.

Value stock

One problem Paragon has faced down is its focus on buy-to-let, which has been hit hard by the Treasury’s tax crackdown on amateur landlords. Fortunately, the business focuses on the professional market rather than the dwindling private investor sector, and its buy-to-let pipeline climbed 3.2% to £733m. The bank cannot see any signs of deterioration or stress in the credit performance of its loan books, although it’s making precautionary preparations, and maintains a tight risk appetite.

Roland Head admires Paragon’s resilience, noting it has survived several boom and bust cycles since launching in 1985. He also likes its dividend potential, with a forecast yield of 4.7%, covered 2.4 times. Paragon stock is valued at a lowly 8.9 times forecast earnings. So Lloyds isn’t the only potential bargain in the banking sector.

The post Got £2,000 to invest? I’d buy the Lloyds share price and this FTSE 250 dividend stock appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

Things were better outside the capital, but credit specialists Totally Money could only find 10 postcode areas in the UK with rental yields above 8%.

For new landlords, I believe that real returns are likely to be very much lower than this. Totally Money’s theoretical yields were calculated ‘gross’, by comparing rents with property prices. They didn’t include the cost of mortgage interest, repairs, insurance, or empty periods between tenants.

In my opinion, anyone buying a house to rent today will be lucky to make more than 5% per year. I think there are much better options elsewhere.

How to earn 10% from housing

FTSE 250 group Galliford Try (LSE: GFRD) is an unusual mix of construction firm and house-builder. Shares in this hybrid firm have dipped by about 45% over the last two years, as the company has fallen dramatically out of favour.

This collapse is partly due to general concerns about the outlook for the construction and housing sectors. But Galliford’s slump has been made worse by some company-specific problems which followed the failure of Carillion.

As a result, Galliford shares now trade on just 5.3 times 2019 forecast earnings and offer a 10% dividend yield.

This must be too risky?

You might think that this extreme valuation is a sign of problems ahead. Normally, I would agree with you. But in this case I think the market sell-off has probably gone too far. The shares appear to be priced for a disaster, but there’s no sign of this at the moment.

The group has recently won two major road-building contracts which form part of an £8bn framework awarded by Highways England. Meanwhile, the performance of its house-building division, Linden Homes, is said to have been in line with expectations in 2018.

Other house-builders are also reporting stable performances with a strong outlook. In my view, Galliford’s 10% dividend yield could make the stock a more profitable investment than buy-to-let at the moment.

Another way to profit from buy-to-let

If you own one or two buy-to-let properties, your risks are highly concentrated. One-off costs like boiler repairs or new kitchen appliances can put a big dent in your rental income.

An alternative way to invest in the rental sector is through Paragon Banking Group (LSE: PAG). This lender specialises in buy-to-let mortgages, which accounted for 72% of new lending during the final three months of 2018.

Paragon’s performance has been consistent and profitable in recent years. The firm’s return on tangible equity — a key measure of banking profitability — rose to 16.1% last year, while underlying pre-tax profit rose by 7.8% to £156.5m.

One attraction is that the group is able to fund an increasing amount of its lending using customer deposits made into its savings bank. Deposits are generally much cheaper than any form of borrowing for a mortgage lender, so by doing this Paragon can remain competitive and enjoy decent profit margins.

This lender has been in business since 1985, so it’s survived several boom and bust cycles already. This gives me confidence in the long-term outlook for the business. With a well-covered dividend yield of 5.2%, this is a stock I’d consider buying.

The post Forget buy-to-let. I’d rather collect 10%+ from this FTSE 250 dividend stock appeared first on The Twelfth Magpie.

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• How much do you need in a SIPP to target a £1,520 a month retirement income?

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Personally, I prefer to gain exposure to the housing market by investing in listed companies with exposure to UK property. Today, I’m going to look at two such firms, both of which offer attractive 5% dividend yields

A guaranteed profit from buy to let?

One way to make money from buy-to-let property is to provide mortgages for landlords. Paragon Banking Group (LSE: PAG) is a specialist buy-to-let lender with more than 20 years’ experience. During the year ending 30 September, the value of new loans to landlords rose by 6.8% to £1,495.5m.

This increase helped to lift the group’s adjusted pre-tax profit by 25.3% to £181.5m last year. Paragon’s return on tangible equity — a key measure of profitability for lenders — rose from 13.4% to 16.1%.

Demand from buy-to-let landlords is said to remain strong. The firm’s pipeline of new lending opportunities rose by 28.9% to £778.9m last year. One reason for this may be that tougher government rules on lending to landlords have prompted some smaller lenders to exit this market. This could make it easier for larger players like Paragon to increase their market share.

Why I’d buy

Paragon’s main focus is on what it calls “professional landlords.” This generally means borrowers with more than three mortgaged rental properties, or those renting houses of multiple occupation.

As a potential investor, this looks more attractive to me than pinning my hopes on a single rental property.

I’m also attracted by Paragon’s valuation. The shares currently trade at just 1.2x their tangible net asset value of 359p per share. Alongside this, broker forecasts indicate a dividend yield of 5.1% for 2018/19. Overall, these shares look good value to me. I’d rate Paragon as a buy.

Bricks, but no mortar

Many new-build houses are sold to rental landlords. Although you can invest directly in house-builders, one way to spread your exposure more widely is to buy shares in a brick maker.

One of my favourite stocks in this sector is Forterra (LSE: FORT). Shares in this firm have fallen by nearly 30% this year, but I think this sell-off may have gone too far.

The group’s latest trading update reported “good levels of activity in the new build residential sector.” Sales so far this year are said to be “marginally ahead” of last year. Although rising costs from energy, fuel and carbon credits put some pressure on profits, the company still generated enough cash to reduce net debt by 8% to £56.1m.

Unfortunately, problems with a kiln mean that this facility will have to be rebuilt before operations resume. This means that operating profit this year will be £2m-£3m lower than expected.

I don’t see this one-off problem as a huge concern. Broker forecasts indicate that earnings are expected to rise by 4%, to 25p per share this year. This earnings figure should cover the forecast 10.4p dividend 2.5 times, providing a good margin of safety for income seekers.

At the time of writing, Forterra shares were trading at 218p. This puts the stock on a forecast price/earnings ratio of 8.3 with a dividend yield of 4.9%. I believe this could be a good buy, despite the risks of a housing slowdown.

The post Forget buy-to-let! Here are two 5% dividend stocks I’d buy instead appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

But they aren’t the only choice for UK investors. The recent performance of some smaller banks suggests to me that they could be superior investments.

Beating expectations

Underlying pre-tax profit rose by 21% to £167.7m in 2017 at buy-to-let mortgage specialist OneSavings Bank (LSE: OSB), beating market forecasts.

The group’s underlying earnings rose by 23% to 51.1p, ahead of consensus forecasts for 48.1p per share. This supported a 22% increase in the dividend, which rose to 12.8p per share.

Despite these solid figures, shares in the bank — which trades as Kent Reliance — fell slightly this morning.

This fall was caused by the bank’s warning of “a significant increase in operating costs in 2018”. However, I don’t think investors need to be too concerned. As I’ll explain, I believe this bank remains well-positioned for growth.

Challenges ahead

This sector does face some headwinds. Recent new rules for buy-to-let landlords have made the business tougher, and the market is shrinking. Banks also face additional regulatory costs, which OneSavings estimates at £7m in 2018.

Funding costs for new lending may also rise this year, as a government-backed cheap funding scheme has now closed. This could result in higher interest rates on savings accounts in 2018.

I’m still positive

OneSavings’ after-tax profits have risen from just £9.1m in 2012 to £126.9m in 2017. This growth process continued last year, when the bank’s loan book grew by 23% to £7.3bn.

So far, loan quality appears to remain high. The bank’s loss ratio on loans improved from 0.16% to 0.07% last year. Return on equity — an important measure of profitability — remained high at 28%, albeit down by 1% from 2016.

Trading at 390p, these shares look expensive compared to their net asset value, which I estimate at 238p per share. But the bank’s high return on equity means that the shares trade on just 8 times forecast earnings with a yield of 3.3%. I believe further gains are likely, despite the headwinds facing the business.

A better alternative?

OneSavings Bank isn’t the only specialist lender that’s performing well. One rival is Paragon Banking Group (LSE: PAG), which focuses on buy-to-let, commercial loans and motor finance.

Like OneSavings, Paragon gets much of its funding from the retail market, where it offers a competitive range of savings accounts. Funding from deposits doubled to £3.6bn last year, indicating good consumer demand for savings products, even at low interest rates.

What caught my eye was Paragon’s apparent combination of balance sheet strength and rapid growth. Total lending rose by 28% to £1,853.4m last year. This lifted earnings by 6.4% to 43.1p per share and boosted the group’s return on tangible equity to 13.4%.

Although the group’s return on equity is lower than that of OneSavings, Paragon’s CET1 ratio — an important measure of strength — is higher, at 15.9% versus 13.7%. Shareholders also receive a more generous level of income, as the policy from 2018 is to pay out 40% of earnings as dividends, compared to 25% at OneSavings.

Paragon shares currently trade on a forecast P/E of 10.6 and offer a prospective yield of 3.7%. If you’re interested in building a market-beating portfolio, I believe both of these stocks deserve a closer look.

The post Two hidden banking stocks I’d buy with £2,000 today appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

That’s why Barclays (LSE: BARC) and other shares with fast-growing dividends could be of interest. Alongside this financial services sector peer, the bank’s share price could be positively catalysed by a more optimistic dividend outlook.

Improving prospects

Under its current management team, Barclays has been a rather disappointing income stock. It decided to hold dividends at 3p per share in recent years in order to focus on improving the strength of its balance sheet. While this may lead to better capital ratios which could provide a more stable growth outlook for the long term, it means that investors in the company have had to make do with a dividend yield of around 1.5% or less.

With inflation recently moving to over 3%, this means the stock has failed to offer a real income return. But with earnings due to rise by 32% this year and 14% next year, the prospects for income investors could be about to dramatically improve. The company is forecast to raise dividends per share to 5.5p in 2018, followed by further growth to 8.2p in 2019. This is an annualised growth rate of around 65% and puts the company on a forward dividend yield (for 2019) of 3.9%.

This could appeal to investors if inflation remains high. The market does not yet appear to have priced-in the rising profitability and shareholder payouts that are expected. Evidence of this can be seen in the stock’s price-to-earnings growth (PEG) ratio being a rather lowly 0.7. As such, now could be the perfect time to buy it for the long run.

Growth opportunity

Also offering strong dividend growth potential is private and commercial banking specialist Paragon (LSE: PAG). The company released a first quarter update on Monday which showed it continues to make good progress with its strategy. New lending increased by 65% compared to the first quarter of 2017, with an increasing proportion of complex buy-to-let lending flows following the PRA rule changes. With growing demand and opportunity within specialist UK lending markets, the company’s outlook appears to be positive.

In fact, Paragon is forecast to post a rise in its bottom line of 8% this year, followed by further growth of 11% next year. This puts it on a PEG ratio of 0.9 and means that there could be significant upside potential on offer. It also means that dividend growth could be high and with the stock expected to yield 4.1% from a dividend which is covered 2.6 times by profit in 2019, it could become a popular income share over the medium term.

The post Barclays plc isn’t the only dividend growth stock I’d hold for the next decade appeared first on The Twelfth Magpie.

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Peter Stephens owns shares in Barclays. The Motley Fool UK has recommended Barclays. 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.

The directors pushed up the dividend by a little over 16% underlining the firm’s attractions as an income investment. Today’s share price around 472p throws up a forward dividend yield around 3.4% for the trading year to September 2018. Not bad, but the firm is committed to giving more back to investors, saying it reduced the dividend cover ratio of 3 to 2.75 for 2017 and expects to reduce cover down to 2.5 for 2018.

An emerging force

As a bank, Paragon is not embroiled in legacy issues or engaged in trying to turn its business around like old-guard firms such as Barclays (LSE: BARC). Growth in earnings at Paragon looks ‘clean’ whereas Barclays looks like it’s struggling to regain lost ground after a few years of earnings reversals.

Paragon reckons it has spent the last few years in transition from “a monoline centralised lender to an increasingly diversified banking group.” During the year to September, the directors reorganised the structure so that most operational activities moved to its banking subsidiary, Paragon Bank, following authorisation from the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA). The company changed its name to Paragon Banking Group in September 2017 to become an emerging force on the banking scene in Britain, so I reckon ‘right now’ is a good time to look more closely at the stock.

City analysts following the firm predict that earnings will grow 11% for the year to September 2018 as the firm targets the needs of consumers and small/medium enterprises (SMEs) as a specialist lender in the UK market. The directors say that strong organic growth looks set to continue but that will be augmented by merger and acquisition (M&A) activity if opportunities arise.

As well as ensuring that strong capital and leverage ratios keep the business robust, the directors plan to bung around £50m into an ongoing share buy-back programme, which could end up enhancing returns for investors as long as the underlying business keeps growing. Meanwhile, we can pick up some of the shares on a forward price-to-earnings (P/E) ratio just below 10, which seems undemanding.

Barclays staggers to its feet

The firm shapes up well against Barclays. The five-year financial record shows mostly double-digit annual percentage increases in earnings, whereas Barclays posted big earnings reversals as often as advances over the same period. Meanwhile, Barclays’ forward dividend for 2018 will be lower than the firm paid out in 2012 – Paragon’s will be around 124% higher over a similar period.

Back in October, chief executive, James E Staley, said: “The third quarter of 2017 was particularly significant for Barclays as it was the first for many years in which we have not been in some state of restructuring.”  We could argue that now, then, is the perfect time to focus on the firm as it rises from the quagmire of its past. But why take the risk? Who knows what further problems may yet emerge from the banking goliath. I’d rather take my chances with the vibrant new upstart in town, so my attention is on Paragon.

Stocks for the long term

The post A ‘secret’ dividend and growth banking stock I’d buy over Barclays plc appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.