I’m not a fan of owning one stock for passive income and relying on it solely for dividends. I’d rather spread my options across a host of shares. This helps to lower my risk of one company cutting the dividend.
Yet this doesn’t mean I can’t build a large holding in one particular stock that I think could do really well. Here’s one I’m thinking of buying.
A specialist lender
The company is OSB Group (LSE:OSB). The FTSE 250 stock’s down a modest 3% over the past year. It has a high dividend yield of 8.7%.
OSB Group’s a specialist UK lender, with £25.8bn in statutory loans. It doesn’t try to compete too much in the normal residential mortgage market, dominated by the large high street banks. Rather, it primarily focuses on sub-segments of the mortgage market. This includes areas like Buy to Let, complex commercial and semi-commercial, development finance, bridging and asset finance.
As a result, the margin it can charge on loans is higher, as these are more risky loans. Of course, this added (higher) interest rate is needed, because the default rate’s higher than a normal loan. But the sweet spot comes via having specialist knowledge and being able to pick the right deals to get involved in. This allows OSB to ultimately be a profitable financial services firm.
For example, a recent trading update showed those clients that were three-months-plus in arrears was 1.7%. This is a measure of risk, but at 1.7% I don’t see this as worrying.
Focusing on income
For dividend investors, the focus is if OSB can generate good profits and cash flow to keep the dividend yield high. The latest dividend cover ratio’s 2.34. This means the dividend payments are covered 2.34 times by the latest earnings per share. This is a good figure and unless it falls below 1, I don’t see much risk of income payments being halted.
One risk is that the Buy to Let division might struggle going forward. The firm spoke about the “potential impact on the future plans of professional landlords due to the increase in stamp duty on second properties introduced following the recent budget”.
Based on the current share price of 377p, I can model how many shares I’d need to purchase to build a set level of income. I’m going to assume I can invest £300 a month in OSB Group. I’ll aim to try and keep this up for five years, meaning that at the end I could have £18,000 invested, giving me a total of 4,775 shares. I’m assuming the share price stays at 377p, in reality it could move higher or lower.
If I factor in a yield of 8.7%, this means that in year six I could stand to make £1,566 just from this one stock.
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Jon Smith 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.
