I’m on the hunt for FTSE 100 stocks that will generate a reliable second income stream, and Barclays (LSE: BARC) shares have caught my eye.
It may seem odd to use the word reliable about any bank today, given concerns over contagion following Friday’s collapse of Silicon Valley Bank. Shares in Barclays fell 5% on Friday, and are down another 5% today.
I’m after cheap dividend shares
Yet for an old contrarian investor like me this also makes now a tempting time to invest. I much prefer buying shares when others are selling, as that way I can pick them up at a cheaper price.
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Barclays shares are 17.03% cheaper than they were just one month ago. While they’re broadly flat over one year, they’ve fallen 25.85% over five. There are two ways of looking at that. The optimist in me says Barclays must now be a bargain. The pessimist fears it’s a value trap.
Barclays shares have been a letdown for long-term investors. They peaked at around 678p in July 2007. Today, they trade at 149p. The shares didn’t just fall in the white heat of the financial crisis. They’ve lost almost half their value since 2013.
This suggests that if the banking sector goes into meltdown again, any recovery could be slow and tortuous. The Bank of England’s latest financial stability report claimed UK banks are sufficiently capitalised and strong enough to deal with a sharp deterioration in the economic outlook. That’s encouraging, but the BoE is hardly infallible.
Buying Barclays shares today inevitably comes with risk attached. On the plus side, that makes them cheap. They trade at just 5.1 times earnings, as measured by the price-earnings ratio, making this one of the cheapest stocks on the FTSE 100. The price-to-book value is 0.4, where a figure of one is seen as representing fair value.
Low price, high yield
The Barclays share price slump has another positive spin-off, as it boosts the dividend yield. Currently, it pays income of 4.6% a year, nicely above the FTSE 100 average of 4%, and with something else to recommend it. The payout is covered 4.2 times by earnings.
Traditionally, cover of two is seen as ample, so this gives plenty of scope for progression and management is expected to seize the opportunity. Next year’s yield is forecast to be 5.8%, which will still be generously covered 3.8 times by earnings.
If I invested £10,000 today, I could expect income of around £580 next year (tax-free in an ISA). With luck, it should rise after that, as I reinvest my dividends for growth. By the time I draw the dividends as retirement income in 12 to 15 years, it should be a lot, lot higher.
The danger is that banking stocks could go into a tailspin from here. I’ll reduce the risk by drip-feeding money into Barclays over the next few months, when I have the cash available, taking advantage of the current volatility.
As ever, I would further reduce my risk by holding a balanced portfolio of shares covering a range of sectors, and hold for a minimum of 10 years, and ideally, much longer. With luck, Barclays could pay me a second income for life.
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