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Dividend investing can be a great way to earn a second income. Fortunately, there are many UK shares offering attractive returns today.
One FTSE 250 The stock that catches my attention the most is that of the Anglo-African specialized bank. Investec Group (LSE:INVP). The banking and wealth management company currently offers a dividend yield of 6.44% and has an impressive recent trading history. In fact, Investec’s share price is up 279% from its pandemic low in September 2020 and is up 36% in five years.
So should investors who can afford it consider buying 3,874 Investec shares today for £1,200 of annual passive income? Here is my opinion.
The business model
Investec combines asset management and specialist banking in its business model, deriving the majority of its revenue from the latter division.
In an impressive set of FY23 results released in May, the group’s total operating revenue rose 14.6% to £2.28bn and adjusted operating profit soared 21.1% to £869.5m .
| Division | Operating income | Operating profit |
|---|---|---|
| Specialized Banking | 78% | 84% |
| Wealth and investment | twenty-one% | 14% |
| Group investments | 1% | 2% |
Investec serves institutional, corporate and private clients worldwide. Although the company’s customer base is global in nature, it is particularly concentrated in Great Britain and South Africa.
This exposure to emerging markets provides companies with access to high-growth opportunities, while also presenting significant macroeconomic and political risks for investors.
Dividend income
As I write, Investec’s share price is £4.81. Therefore, buying 3,874 shares would cost a total of £18,633.94. Fortunately, this fits neatly within the £20k annual contribution allowance for a stocks and shares ISA.
With that stake, investors could expect a second income of £1,200 a year at current yields. Considering the dividend coverage is solid, at 2.2 times earnings, it offers a healthy margin of safety.
However, £18,600 is a lot to invest in a single share. Consequently, investors managing smaller portfolios may want to consider spreading their investments across a variety of companies and sectors to reap the benefits of portfolio diversification.
Risks
Although Investec stock has a strong dividend outlook and roughly 16% upside from current levels, based on the city’s consensus price target, there are reasons for concern that potential investors should be aware of.
South Africa is a particularly high political risk jurisdiction. Unemployment is over 30% and civil unrest is rising due to ongoing power outages and skyrocketing costs of living.
Given that Investec generated 52% of its adjusted operating profit in South Africa, the listed lender faces specific risks related to its core markets that are not shared by many other FTSE 250 stocks.
Additionally, the bank can attribute much of its recent strong performance to rising global interest rates. With signs that central banks may be taking a breather after a series of aggressive hikes, Investec’s growth trajectory could slow as a result.
A stock to buy?
Investec shares have so far made a stronger post-Covid recovery than the majors FTSE 100 banks of Barclays to Lloyd’s. Today, the stock looks reasonably cheap with a price-to-earnings (P/E) ratio of just 5.4 and a strong dividend yield.
Despite the risks, I would buy this stock if I had extra money. Overall, I think it deserves serious consideration from investors looking for a healthy second income.
