These dirt-cheap FTSE 100 shares offer yields far above the index’s 3.9% forward average. Which would be the better choice for dividend-hungry investors?
Barclays
High interest rates have provided a huge boost to banks like Barclays (LSE:BARC). The Bank of England has recently raised its benchmark to 15-year peaks of 5%. And very few people think policy makers are done yet as inflation remains sky high.
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In fact the International Monetary Fund (IMF) this week warned that rates “would need to remain higher for longer” if prices continue soaring. In this scenario, the net interest margins (NIM) for Britain’s banks — which measures the difference between what lenders charge borrowers and pay savers — should continue climbing.
The problem for Barclays and its investors is that the damage caused by higher rates will likely outweigh the benefit of higher NIMs. The IMF has said that rate increases will restrict UK economic growth to just 0.4% in 2023 and 1% next year.
In this climate, demand for its loans and other financial services could grind to a halt. It also faces a raging torrent of credit impairments as people and businesses struggle to make ends meet. The bank’s already set aside more than £1.7bn to cover bad loans.
Added to this, Barclays’ large corporate and investment bank business leaves it open to additional stress. Financial markets and investor confidence are steadily retreating as worries over the global economy mount, leaving the potential for sinking profits.
The FTSE 100 bank currently carries a large 5.8% dividend yield for 2023. But the prospect of strong and sustained weakness in its share price makes this a stock I’m happy to avoid.
Not even a low price-to-earnings (P/E) ratio of 4.6 times is enough to tempt me to invest. I think some sizeable downgrades to profits and dividend forecasts could be coming.
Severn Trent
I think Severn Trent (LSE:SVT) is a better value stock to buy for passive income. It trades on a rock-bottom price-to-earnings growth (PEG) ratio of 0.3 for this financial year. A reading below one indicates that a stock is trading below value. And its 4.8% corresponding dividend yield easily beats the FTSE index average.
Investing in water companies isn’t without its own risks. The possible collapse of Thames Water has put the debate about privately-owned utilities back on the agenda. Calls for a wide range of action for suppliers — from increased investment and reduced dividends, right through to renationalisation — are all doing the rounds.
Yet as things stand, companies like Severn Trent remain about as stable as they come. And this (in my opinion) makes them ideal for these uncertain times. The essential service they provide means they have the earnings visibility — and thus the means and the confidence — to keep paying big dividends.
On top of this, the firm has pledged to raise annual dividends in line with consumer price inflation including housing costs (CPIH) through to 2025. This can change, of course. But right now it makes the company even more attractive in this inflationary era.
This is why I’ll be looking to buy it for my own portfolio when I have spare cash to invest.
