I’ve been screening the UK market for passive income ideas, and NatWest (LSE:NWG) keeps popping up. The bank’s shares have climbed about 34% in the past year, the dividend has been rising, and the yield is hovering around 5.1%.

On paper, it looks like the kind of stock often found in income portfolios.

But that strength raises a question: following the recent rally, does it still make sense as a passive income buy – or a chase on yesterday’s gains?

The income story looks strong

There’s no denying that NatWest’s recent numbers make a compelling case. The bank ramped up its interim dividend by a massive 26% to 12p per share – a clear signal of confidence. Profitability remains strong and its capital ratios allow significant cash returns to shareholders through dividends and buybacks.

And while the economy isn’t the strongest right now, the banking sector is healthy. NatWest, in particular, has focused on improving efficiency, controlling costs and sticking to core lending.

For a passive income investor, that discipline speaks volumes.

The yield isn’t the highest in FTSE terms – a £10,000 position would only pay out roughly £500 a year. But the growth, reliability and consistency is what long-term income investors like to see. When planning to compound a pot through reinvestment over decades, that’s what I typically look for in dividend stocks.

But even with numbers this good, why does the rally make me pause?

Why the rally makes me nervous

The first issue is valuation and timing. NatWest’s share price has already rallied hard as its turnaround story played out. That leaves me asking: how much of the good news is already priced in?

Buying after a big run often means lower expected future returns and higher sensitivity to disappointment on margins, bad debts or guidance.

Bank dividends are also inherently cyclical. They’re tied to:

• The interest rate path and net interest margins.
• Loan-loss provisions if the UK economy slows.
• Regulatory and political risk, from taxes to mortgage market rules.

So I have to ask: do I really want a chunk of my passive income dependent on the health of the UK housing market and the Bank of England’s next move?

Sure, the payout looks secure during good times. But in a downturn, bank dividends can be cut quickly to preserve capital.

That doesn’t mean there’s anything structurally wrong with NatWest itself. It just means it differs from most income stocks in the utility or a consumer staples sector. The yield is slightly higher, but the risk is elevated.

My verdict

For now, I’ll be keeping NatWest firmly on my watchlist while the broader macro situation plays out. Call me opportunistic, but I’d rather wait for a share price pullback that pushes the yield higher.

Or, at the very least, more evidence of dividend stability in the event that rates fall and margins compress. When targeting passive income, it’s never just about today’s yield. It’s about whether that income survives the next downturn.

If the bank can maintain or grow its dividend through the next rate-cut cycle without a spike in bad debts, I’ll reconsider. Until then, I’m happier looking at more defensive income stocks – utilities, consumer staples, certain REITs – and I think I’ve found one that meets my criteria.

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Mark Hartley does not hold any positions in the companies mentioned.