I started posting about foreign stocks based on my readership last week when I wrote about Penn West Energy Trust in Canada. It seems to me a lot of Canadians follow dividend investing strategies. Great Britain is my third largest audience after the US and Canada, so here is a post on my favourite dividend stock in the United Kingdom: Royal Bank of Scotland (RBS)

RBS was founded in Edinburgh in 1727 and is the largest banking group in Scotland, the second largest in the UK and Europe, and the fifth largest in the world by market capitalization. According to Forbes Global 2000, it is currently the 10th largest company in the world. Its shares have a primary listing on the London Stock Exchange as well as a listing on the New York Stock Exchange. The scale of its businesses has grown significantly over the past five years through strong organic growth and acquisitions.

I had been watching RBS for several months and I started purchasing some shares after it dropped below $6 a share. The stocks has hit a new 52 week low of $3.12 in July and the 52 week high for the stock was $11.50. The shares have been moving up since mid July and closed last night at $4.69. I have been making additional purchases and now have an average cost of $4.85. I expect the stock price may drop lower again and I plan to make additional purchases over the next few month.

The past few years the bank has been on a buying spree and has grown very quickly and now is having some pains with integration into the RBS system as well as security write downs like every other bank. I think they were also hurt by paying too much for their most recent purchase of ABN AMRO.

S&P gives RBS a 4 Star (Buy) rating with a 12 month target price of $7 a share. Reuters research gives the stock an Outperform rating. If the stock only reaches $5.34 over the next 12 months that is still a 10% increase based on my current price of $4.85. Foreign banks are very quick to change dividend payouts depending on company profits or the lack of them. So I could definitely see the dividend being lower next year.

I see this stock as being undervalued compared to it's long term prospects. Once the company blends the different banks together and starts creating operating efficiencies and management comes up with a long term plan for the bank, this stock should start to turn around. I believe this company can right itself over the next year and this should be a $8 stock in the next two years. At that time when profits increase you will see the dividend being increased once again.

Cheers!

Disclosure: The Div Guy owns shares of RBS as the time of this post.