Top income stocks for summer 2024

The high-yielding shares of HSBC Holdings (LSE:HSBA) and NatWest Group (LSE:NWG) have been highlighted in a report examining the dividend appeal of the UK financial sector.

In its latest income monitor, Shore Capital also draws attention to buy-to-let specialists OSB Group (LSE:OSB) and Paragon Banking Group (LSE:PAG) with their respective yields of 6.8% and 5.4%.

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The quartet of UK lenders feature in the top 20 of Shore’s FTSE 350 income screen, which identifies the stocks with high yields, a record of dividend per share growth and a financial position strong enough to support current payout ratios.

The top-ranked stock is Bermuda-based insurer Lancashire Holdings Ltd (LSE:LRE), whose FTSE 250-listed shares currently yield dividend income of 12.6%. Leading FTSE 100 stocks include Imperial Brands (LSE:IMB) on 7.4%, BP (LSE:BP.) on 5.2%, and Lloyds Banking Group (LSE:LLOY) with a 5.1% yield.

The FTSE All-Share offers a 12-month forward yield of 3.9%, but with modest valuations UK banks dominate the top end of Shore’s income stock screens.

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HSBC shares have underperformed the sector this year, despite improving profitability and a stronger capital position through disposals such as this year’s exit from Canada.

Its increased shareholder distributions have included the first-quarter special dividend worth 21 US cents a share relating to the proceeds of the Canada disposal.

This contributes to a 2024 forecast dividend yield of 9.4%, while in terms of historic progress, HSBC has delivered a 10-year dividend growth rate of 4.4%.

NatWest has also seen its profitability and broader financial performance improve, meaning it is in a strong position to return capital to shareholders, as well as carry out further directed share buybacks of the Treasury’s stake. It trades with a forward yield of 5.2%.

The dividend rose by 22% last year, part of a commitment to a 40% payout ratio with its capacity for share buybacks underpinned by a capital ratio target range of 13-14%.

On OSB Group, Shore Capital believes the specialist lending and retail savings group is well positioned to benefit from the ongoing professionalisation of the UK buy-to-let market.

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Despite recent disappointments on net interest margin guidance, it pointed out the group remains very profitable and well capitalised.

Shore said: “We expect these factors to underpin a growing dividend with further distributions to shareholders by way of share buybacks.”

OSB currently offers a 6.8% forecast dividend yield, having delivered a striking 10-year dividend per share compound annual growth rate of 23.4%.

Paragon’s interim results indicated an improvement in its lending pipeline, meaning loan-book growth is expected to accelerate and potentially consume more growth capital.

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However, Shore still expects healthy dividend growth and ongoing share buybacks. The stock has a 10-year dividend growth rate of 15.3%.

On its UK smallcap screen, Shore highlights the forward dividend yields of 6.5% for MTI Wireless Edge Ltd (LSE:MWE) and 6.6% for content translation and localisation firm RWS Holdings (LSE:RWS).

MTI’s progressive dividend policy is backed up by its 10-year growth rate of 21% and a strong balance sheet that boasts a net cash position of about $8.3 million.

Shore adds that RWS has a healthy balance sheet with £24.4 million of cash, while it has generated a three-year average free cash flow yield of 14%.