8.21% yield and a P/E of only 5! This is my favorite income stock for October

I FTSE 100 it's full of great value UK equities paying high rates of income, but why stop there? Smaller companies can also offer good yields and some are much cheaper, including this hidden one FTSE 250 precious stone.

OSB group (LSE: OSB) caught up with me a few weeks ago. I was going to buy it then, but I'm completely invested and have no money to spare. I'm not giving up hope though.

OSB is a specialist mortgage lender financing buy-to-let, self-employed, bad credit and commercial mortgages using retail deposits from its savings franchises Kent Reliance and Charter Savings Bank.

FTSE 250 high yield share

OSB may not be a household name but it can trace its roots back to 1898, when it was founded as the Chatham & District Reliance Building Society. It was renamed Kent Reliance in 1986, then floated in 2014 as OneSavings Bank at 170p per share.

Today, OSB is trading at 390p but performance has been erratic recently. Shares are up 16.97% in 12 months, but only 5.41% in five years (including the pandemic, of course).

It had a tough three months, down 13.1%, following a disappointing set of half-year results on 15 August.

The board cut full-year interest rates from 250 basis points to between 230 and 240 basis points, blaming a competitive mortgage market. Markets expect the Bank of England to cut interest rates in November and December this year, and that could further squeeze OSB's margins.

Falling interest rates can have an effect, however, by increasing the activity of the property market, and the demand for loans.

But there is another danger. OSB is responsible for writing 9% of all new buy-to-let mortgages. Unfortunately, this is also tight. The media is full of landlords who say they are selling, as tax breaks are squeezed, renters are given more rights, and energy efficiency regulations are likely to be tightened.

The looming Employers' Bill of Rights adds to the sense of fear, while higher borrowing costs don't help. The panic may be overblown but still, it's an important idea.

A cheap buying opportunity

These risks are most evident in today's low price-to-earnings ratio of just 5.15 times earnings. The reward, of course, is that high yield of 8.21%.

So is the dividend sustainable? It covers 2.6 times profit, which is comforting. In August, the board was pleased to increase the interim dividend by 5% to 10.7p per share. Earnings per share have grown steadily but the pace of growth has stagnated over the past few years, as this chart shows.

Chart with TradingView

The board was however pleased to approve the £50m new share buyback, which started last month.

The 10 analysts providing one-year price targets for OSB set the average figure at 554p. That's up 39.85% from today's price. Think about that and an 8% yield? Not guaranteed, of course.

If markets recover, OSB could lead the charge. There is risk but given the size of that secondary income it is the first stock I will buy in October. I just need to get the money together.