So I want £100 a month in passive income, and I’m eyeing Barclays (LSE: BARC) shares. How many do I need?
Going on a recent share price of 173p, and a forecast dividend yield of 4.6%, I’d need 15,079 shares. So all I have to do is stump up £26,087 (plus trading costs). Sorted.
OK, anyone can work out a quick sum like that. And there’s more to it.
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ISA
But first, one thought hits me straight away. That £26k is more than the £20k Stocks and Shares ISA limit.
But what if I could put a whole year’s ISA into Barclays shares, and then next year’s into another stock with around 5% dividends? In just 12 years, I could have set myself up an monthly passive income of about £1,000 a month. Nice.
Oh, hang on. That’s wrong. I just added up the money I’d have invested. And I ignored the compounding effects of reinvesting my dividends.
Start again
So I invest a full £20k ISA in a 5% dividend stock each year. And I use my dividends to buy more shares. It would take less than 10 years to reach my goal.
And that still ignores any dividend rises, or share price gains. Or, of course, falls in both — but over the very long term, there’s been a steady upwards trend in the UK stock market.
Actually, I’ve overlooked another thing here. What if, just as I get close to the end of my 10 years, there’s another banking crisis and the value of my shares crashes?
That’s why I wouldn’t really put all my cash in just one stock. Or just one sector. No, I’d diversify to reduce my risks.
Big yields
And there are plenty of FTSE 100 stocks paying 5% or more in dividends.
A quick look shows Taylor Wimpey and Aviva both on forecast 6.9% dividend yields. Then there’s BT Group up at 7.2%. And there are even some 10%+ yielders, including British American Tobacco with 10.3%.
Hmmm, I think I could stand a good chance of getting more than 5% a year. And with just these few stocks, I’d be into five different sectors. That’s already a nice bit of diversification.
Barclays outlook
But back to Barclays shares. Are they really dirt cheap? Valuing bank shares might be fraught in today’s economy.
But forecasts show nicely rising earnings in the next few years. And that would drop the price-to-earnings (P/E) ratio to under four by 2026. That’s about a third the long-term average FTSE 100 valuation.
The dividend yield could rise to 6.5% by 2026 if these forecasts are right too.
Bank risk
Now, the short-term outlook for banks is still a bit shaky. So if I bought Barclays shares today, I’d half expect to see some more falls before any gains. But that’s why this is all a long-term thing. And yes, I see them as long-term super cheap.
I really do think my best chance of earning monthly passive income is to invest as much as I can, regularly, into dividend shares in a Stocks and Shares ISA. And then watch it build.
