I’m always on the hunt for shares that offer me the chance to generate passive income on the side. Therefore, Barclays (LSE:BARC) shares recently caught my attention, with their enticing dividend yield of 5.5%.
It’s fair to say the shares have had a pretty average year, with a 5.4% increase.
This isn’t bad when you consider the fact that the shares are still down 15.2% since the collapse of Silicon Valley Bank back in March.
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But this share price performance still lags the FTSE 100, which has returned 10.2%.
However, while Barclays might not have been the perfect investment, I think it remains a great way to make some money on the side.
The dividend
Barclays shares currently trade at £1.53 and provide a yield of 5.5%.
It’s important to keep in mind that dividends aren’t guaranteed, but with an outlay of £21,818.75 on its shares, I can generate £100 of monthly passive income.
This is likely to rise over time, too. For example, in the first half of 2022, its interim dividend was 2.5p per share. This has risen to 2.75p in the first half of 2023.
Therefore, the £100 of extra income I’d make monthly will grow over time.
If I reinvested the amount, I could make even more.
Risks
While Barclays shares offer a decent return through its dividend, the UK’s struggling economy could change that.
The Bank of England has set the base rate for interest at 5.25%. This is the highest level it has been since 2007.
This will bring Barclays more revenue in the form of interest income, however, there is a risk more creditors could default on their loans. This can therefore hurt its income at the same time.
Moreover, the high inflation currently being experienced isn’t slowing down as quickly as hoped. This creates further pressure on the economy. While the situation isn’t dire, it is fragile. If the economy starts going downhill, then we could see Barclays cut or even stop paying its dividend.
This isn’t out of the question. For example, during the great recession, Barclays cut its dividend by 66% in 2008 and then by a further 78% in 2009. It stopped paying its dividend completely in 2020 as a result of the Covid-19 pandemic.
Why I’m confident it will continue to pay its dividend
Even though Barclays has cut or stopped paying its dividends in previous times of economic difficulty, I don’t believe that’s the case this time.
Firstly, it’s continuing to grow its net income. In these times of difficulty, its after-tax profit grew by 25%. This is a sign that the bank is operating efficiently.
Secondly, it only has a payout ratio of 21%. Therefore, even if its net income starts to fall, then it has plenty of room to keep paying its dividend.
Now what
There are some short-term risks as a result of the economy. However, as a long-term investor, I still recognise that there is a great opportunity for me to generate some extra income with Barclays shares.
With a price-to-earnings (P/E) ratio of 4.5, its shares are also trading at a rock-bottom valuation. Therefore, if I had the spare cash, now would be the perfect opportunity for me to buy some Barclays shares.
