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He FTSE 100 It's packed with great value UK dividend stocks that pay high rates of passive income, but why stop there? Smaller companies can also offer amazing returns and some are very cheap, including this one FTSE 250 jewel.
OSB Group (LSE: OSB) caught my attention a few weeks ago. I would have bought it right then and there, but I'm totally invested and didn't have any money to spare. I won't give up though.
OSB is a specialist mortgage lender that funds commercial, adverse credit, self-employed and rental mortgages using retail deposits from its Kent Reliance and Charter Savings Bank savings franchises.
High-yield FTSE 250 shares
OSB may not be a household name, but its roots date back to 1898, when it was founded as Chatham & District Reliance Building Society. It was renamed Kent Reliance in 1986 and then floated on the stock market in 2014 as OneSavings Bank at 170 pence per share.
Today, OSB trades at 390p, but performance has been patchy of late. The stock is up 16.97% in 12 months, but only 5.41% in five years (which includes the pandemic, of course).
It has had a tough three months, falling 13.1%, following a series of disappointing half-year results on August 15.
The board cut expected full-year net interest margins from 250 basis points to between 230 and 240 basis points, blaming increased competition in the mortgage market. Markets expect the Bank of England to cut interest rates in November and December this year, and that could further squeeze OSB margins.
However, falling interest rates could have a silver lining by boosting housing market activity and demand for mortgages.
But there is another danger. OSB is responsible for issuing 9% of all new buy-to-let mortgages. Unfortunately, this is also being squeezed. The press is full of landlords saying they are selling, while tax breaks are reduced, tenants are given more rights and energy efficiency standards are potentially tightened.
Labour's upcoming tenants' rights bill adds to the sense of fear, while higher borrowing costs don't help. The panic may have been exaggerated, but still, it's perception that matters.
Very cheap purchase opportunity
These risks are largely reflected in the current price-to-earnings ratio valuation, which is just 5.15 times earnings. The reward, of course, is that whopping 8.21% yield.
So is the dividend sustainable? It's covered 2.6 times by revenue, which is reassuring. In August, the board was happy to increase the interim dividend by 5% to 10.7 pence per share. Dividends per share have increased fairly steadily, but the pace of growth has stagnated in recent years, as this chart shows.
Chart by TradingView
However, the board was happy to approve a new £50m share buyback, which began last month.
The 10 analysts offering one-year OSB price targets have set an average figure of 554p. That's 39.85% more than the current price. Imagine that plus an 8% return? It's not guaranteed, of course.
If markets recover, OSB could lead the charge. There are risks, but given the size of that second income stream, it's the first stock I'll buy in October. I just need to raise the money.
