Why Barclays PLC Is A Better Dividend Stock Than United Utilities Group PLC And Imperial Tobacco Group PLC

For dividend investors, Barclays PLC (LON: BARC) seems to be the preferred option to United Utilities Group PLC (LON: UU) and Imperial Tobacco Group PLC (LON: IMT). Here’s why.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It may seem rather strange to state that Barclays (LSE: BARC) (NYSE: BCS.US) is a better investment for income-seeking investors than dividend stalwarts, United Utilities (LSE: UU) and Imperial Tobacco (LSE: IMT).

After all, Barclays currently yields just 3%, while United Utilities has a yield of 3.9% and Imperial Tobacco’s yield is even higher at 4.4%. So, over the course of the next year, you will receive a higher income from investing in the latter two.

However, over the medium to long term, Barclays is likely to deliver a greater yield, whilst offering an increased scope for capital gains. Here’s why.

Should you invest £1,000 in Dowlais Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Dowlais Group Plc made the list?

See the 6 stocks

Dividend Growth

While the headline yield is a major consideration when assessing the income potential of a stock, the potential for dividend growth is arguably even more important. So, while Barclays may yield just 3%, it has huge potential when it comes to increasing the size of its shareholder payouts.

For example, Barclays has a payout ratio of just 34% at the present time and has stated that it intends to increase this to at least 45% in the coming years. Were it to pay out 45% of its current year earnings as a dividend, it would equate to a yield of 3.9% at its current share price. That’s a match for United Utilities and only slightly behind Imperial Tobacco’s yield.

However, working in Barclays’ favour is the fact that other UK banks, such as Lloyds, are aiming to pay out up to two-thirds of earnings as a dividend, which means that Barclays could, in theory, raise its payout ratio beyond its current 45% target over the longer term.

Earnings Growth

In addition, Barclays is expected to grow its bottom line at a rapid rate over the next two years. In fact, its net profit is due to rise by 35% this year, followed by growth of 22% next year. This provides it with an even greater scope to increase dividends and, when combined with its plans to boost the payout ratio, it means that Barclays is expected to increase dividends per share by 32% next year. This compares favourably to growth of 2.3% at United Utilities and 9.3% at Imperial Tobacco and means that Barclays has a forward yield of 3.9%.

Valuation

As well as having the scope to increase dividends at a stunning rate, Barclays also has superb capital gain potential. That’s because it trades at a huge discount to the FTSE 100 which, for a company that is set to grow earnings and dividends at a rapid rate, is difficult to justify.

For example, while the FTSE 100 has a price to earnings (P/E) ratio of around 16, Barclays has a P/E ratio of just 11.5 and this indicates that there is significant upward rerating potential. Furthermore, Barclays also offers much better value for money than United Utilities and Imperial Tobacco, which have P/E ratios of 22 and 15.9 respectively.

Looking Ahead

So, while United Utilities and Imperial Tobacco both have higher yields than Barclays right now, that situation looks set to change over the next few years. While they remain very appealing income stocks and are strong buys at the present time, Barclays offers more growth potential, better value and looks set to become a top notch dividend stock over the medium to long term.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in Dowlais Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Dowlais Group Plc made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Barclays, Imperial Tobacco Group, Lloyds Banking Group, and United Utilities Group. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

These 4 FTSE shares have crashed hard. Which do I like today?

These four FTSE 100 stocks have plunged in value over the last month. But after this latest market meltdown, which…

Read more »

Investing Articles

1 FTSE 250 stock that analysts are calling a ‘Strong Buy’

The FTSE 250 can be overlooked by investors, but analysts believe this stock in particular could be undervalued by as…

Read more »

Close up of a group of friends enjoying a movie in the cinema
Investing Articles

I asked ChatGPT to name 5 FTSE shares for the perfect SIPP. Here’s what it picked

Harvey Jones called on ChatGPT to help him decide which shares would be right to buy for a well-balanced SIPP.…

Read more »

Investing Articles

Should I load up on Rolls-Royce shares after the 17% drop?

Rolls-Royce shares have pulled back sharply in the FTSE 100 in recent weeks, leaving this Fool to wonder if he…

Read more »

Investing Articles

Is this the best S&P 500 stock to consider buying in these volatile times?

With bullion prices still rocketing, I think buying the S&P 500's only gold stock is worth serious consideration right now.

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Yielding 7.25% but with a P/E of 186x! What’s up with the BP share price?

Harvey Jones thought the BP share price was a brilliant bargain but it's only brought him a world of trouble.…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

Down 26% with a 7% yield! Could this little-known FTSE 250 gem make a comeback?

Mark Hartley considers the long-term prospects of FTSE 250 recruiter Page Group. Weak results have sent the price tumbling but…

Read more »

Investing Articles

Analysts are calling Diageo shares a strong buy! Are they mad?

Analysts still have faith in Diageo shares, with 10 of them giving it the highest possible stock rating. Harvey Jones…

Read more »