The FTSE 100 is crammed with great value UK dividend stocks paying high rates of passive income, but why stop there? Smaller companies can also offer stunning yields and some are mega-cheap, including this hidden FTSE 250 gem.

OSB Group (LSE: OSB) caught my eye a few weeks ago. I would have bought it there and then, but I’m fully invested and didn’t have cash to spare. I’m not giving up on it, though.

OSB is a specialist mortgage lender that funds buy-to-let, self-employed, adverse 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 familiar name but can trace its roots back to 1898, when it was founded as the Chatham & District Reliance Building Society. It was renamed as the Kent Reliance in 1986, then floated in 2014 as the OneSavings Bank at 170p per share.

Today, OSB trades at 390p but performance has been patchy lately. The shares are up 16.97% over 12 months, but only 5.41% over five years (which includes the pandemic, of course).

It’s had a bumpy three months, falling 13.1%, following a disappointing set of half-year results on 15 August.

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

Falling interest rates could have an upside, though, by boosting property market activity, and demand for mortgages.

But there’s another danger. OSB is responsible for writing 9% of all new buy-to-let mortgages. Unfortunately, this is also being squeezed. The press is full of landlords saying they’re selling up, as tax breaks are squeezed, renters are handed more rights, and energy performance rules potentially tightened.

Labour’s upcoming Renters’ Rights bill is adding to the sense of dread, while higher borrowing costs don’t help. The panic may have been overdone but even so, it’s the perception that matters.

Dirt-cheap buying opportunity

These risks are largely reflected in today’s rock bottom price-to-earnings valuation of just 5.15 times earnings. The reward, of course, is that supersized yield of 8.21%.

So is the dividend sustainable? It’s covered 2.6 times by earnings, which is comforting. In August, the board was happy to hike the interim dividend 5% to 10.7p per share. Dividends per share have risen pretty steadily but the pace of growth has stalled over the last couple of years, as this chart shows.

Chart by TradingView

The board was nonetheless happy to approve a new £50m share buyback, which began last month.

The 10 analysts offering one-year OSB price targets have set a median figure of 554p. That’s up 39.85% from today’s price. Imagine that plus an 8% yield? It isn’t guaranteed, of course.

If markets recover, OSB could lead the charge. There are risks but given the size of that second income stream it’s the first stock I’ll buy in October. I just need to rake the cash together.