With a P/E of under 8, is this the best FTSE 100 income stock to buy today?

If we're investing with the goal of building an income stream, it's the profit margin that matters, right? As long as that's good, why should the price-to-earnings (P/E) ratio matter?

Well, I would invest mainly in dividend income. But that doesn't mean I'll miss out on any share price gains in potentially undervalued stocks.

No, I would consider it a good bonus, which would give me a healthy boost if I decide to sell some shares in the future.

It's cheap, with benefits

The best type of company to consider buying for income, of course, is one that combines both valuation methods. I'm talking about strong dividend forecasts, and a low P/E ratio.

What I'm thinking today NatWest Group (LSE: NWG). The stock price is actually up 54% over the past five years.

But that still gives us a P/E forecast of just 7.8 for this year, which is only half FTSE 100 long term average. Oh, and it could drop to around 6.8 based on 2026 forecasts.

And the forecast dividend yield remains strong at 4.9%, rising to 5.8% by 2026.

Essential cover

We cannot achieve our long-term passive goals by chasing the biggest profit gains.

Vodafone a good example, with a 10.4% yield this year. But after years of not being able to cover dividends with profits, Vodafone plans to cut its 2025 payout in half.

Those unrevealed assignments may look good while they last, but nothing comes for free. And Vodafone shareholders have paid with a 73% decline in their share price over the past 10 years.

The glow of fat profits can soon fade if expenses are nearly three-fourths of our capital… and income is halved.

There is always the risk that NatWest could cut its dividend in the future too. And that's the first reason why I say an income portfolio needs to be well diversified.

The flow of money

For now, at least, NatWest's dividend looks well covered by earnings. In fact, analysts expect to be covered 2.5 times this year.

And even with expected budget growth, coverage will remain at that level through 2026 if these predictions prove accurate.

How long these shares can continue at this strength is an open question. Do I think the UK has seen the last of its banking crisis? I would say probably not. And falling interest rates could hit NatWest's lending margins.

Nevertheless, the interim dividend was increased by 9%. And during Q3, the board said it expects “paying ordinary dividends of about 40% of the net profit“, while still leaving room for potential share buybacks.

Bottom line

I would never put a lot of money into one income stock. And the banking and financial sector can suffer disproportionately when the economy slows down.

But for my next passive investment, while maintaining good diversification, NatWest is among my top people.