One 5% yield banking stock I'd buy today

Investment returns from some of the big FTSE 100 banking stocks have been poor in recent years. Shares of Barclays, RBS and HSBC are all worth less they were five years ago.

Some smaller and more specialist financial stocks have been stronger performers, so today I'm looking at two potential dividend buys from this sector.

A mixed picture

Shares of investment manager Charles Stanley Group (LSE: CAY) fell by nearly 5% in early trade on Monday, after the 226-year old City firm reported a 4.4% fall the value of clients' funds.

The company said that Funds under Management and Administration (FuMA) fell from £24.9bn to £23.8bn during the three months to 31 March. This compares to a fall of 5.1% for the company's chosen benchmark, the FTSE UK Private Investor Balanced Index.

It looks like the firm's funds probably beat the market by a small margin, although the overall result was also boosted by £200m of net inflows during the period.

It's good that the amount of money invested by clients is continuing to rise. But I think the real story here is the changing mix of business carried out by the firm.

Higher margin services

Stockbrokers such as Charles Stanley offer three types of service for private investors:

  • Execution only - buys and sells stocks on your instructions only.
  • Advisory - provide advice on which stocks and funds to buy and sell
  • Discretionary - invest your money for you, e.g. managed funds

According to Charles Stanley, discretionary services carry "higher margins". The firm is expanding its focus on this area. It says that clients are increasingly switching out of advisory services and into execution only or discretionary products.

City analysts expect this change to help boost profits over the coming year. They're pencilling in a 49% increase in earnings for the year to 31 March 2019. That leaves the stock on a forecast P/E of 13 with a prospective yield of 3.6%.

I'd be happy to buy at this level, although it's worth remembering that a big market correction could cause investors to withdraw cash and cut the firm's profits.

This 5% yielder could do better

One downside of investment managers is that their profits are generally linked to stock market performance. That's not the case for lenders, such as sub-prime specialist International Personal Finance (LSE: IPF).

This company's focus is on doorstep lending and online loans in countries including Poland, Lithuania, Finland, Spain and Mexico. Shares of this group have risen by almost 20% this year following a strong set of full-year results.

Pre-tax profit rose by £9.6m to £105.6m last year. The accounts show that about 85% of this came from the group's European operations, with Mexico the other main contributor.

IPF's profits are supported by a large and mature home credit business, while its online operations are still lossmaking. But performance is improving and I expect this to become a valuable source of profits over the next few years.

Good value?

The current share price of 242p is equivalent to just 1.2 times the group's net tangible asset value of 197p per share. Measured against earnings, the share price gives a forecast P/E of 8.2. There's also a prospective dividend yield of 5.2%.

In my view IPF looks attractive at this level. I'd rate the shares as a buy.

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Roland Head owns shares of Royal Bank of Scotland Group. The Motley Fool UK has recommended Barclays and HSBC Holdings. 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.

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