How Barclays’ high yield could help you become a stock market millionaire

Barclays plc (LON: BARC) appears to have improving income investing potential.

| 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.

While Barclays (LSE: BARC) has a dividend yield of just 1.5% at the present time, its dividend growth potential appears to be exceptionally high. In fact, over the next two years, the bank is forecast to grow dividends per share from 3p to 8.2p. This puts it on a forward dividend yield of 4.2% for 2019, with further dividend growth anticipated thereafter.

As such, now could be the perfect time to buy it. Alongside another dividend stock, which reported a positive update on Wednesday, it could boost your portfolio returns over the medium term.

A changing business

The main reason for the expected increase in Barclays’ dividend over the next couple of years is the progress of its strategy. Under its present CEO, the company has sought to improve its financial strength and the efficiency of its business model. In order to achieve this as quickly as possible, it placed less emphasis on dividends, which meant that they were cut from 6.5p per share in 2015, to 3p per share in 2016.

At the time, many investors were unhappy about the cut. However, after asset disposals and a focus on efficiency, the company appears to be in a stronger position to generate earnings growth over the medium term. In fact, its bottom line is forecast to rise by 15% in the next financial year, which is expected to catalyse dividend growth.

With Barclays’ dividend coverage ratio expected to be 2.8 in the 2019 financial year, further dividend growth could be ahead in 2020 and beyond. In fact, if the company reduced its coverage ratio to 1.75, it could yield as much as 6.6% at its current price level. As a result, now could be the perfect time to buy the stock ahead of what may prove to be a strong period for dividend growth.

Solid growth

While Barclays has delivered a ‘rollercoaster ride’ when it comes to dividends, housing support services company Mears (LSE: MER) has posted robust dividend growth in recent years. The company’s shareholder payouts have risen in each of the last four years, increasing on an annualised basis by 8%.

Looking ahead, the company’s dividend growth prospects appear to be bright. Its pre-close trading update released on Wednesday showed that it’s making solid progress in core divisions. Its pipeline of opportunities remains enticing, while its strategic evolution as a business could mean that it’s able to access growth opportunities that were previously unavailable.

With Mears forecast to grow its dividends by 12% per annum over the next two years, the company has an attractive forward yield of around 4.7%. Given the fact that its dividends are covered 2.4 times by profit and as it’s expected to report positive earnings growth over the next two years, income investing prospects appear to be bright.

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. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »