Neil Woodford’s second-largest holding yields nearly 9%. But is this FTSE 100 stock a ‘buy’?

Neil Woodford appears to be bullish on this high-yielding stock FTSE 100 (INDEXFTSE: UKX) stock. Should you buy it too?

| 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.

The second-largest holding in Neil Woodford’s £5.6bn Equity Income fund is FTSE 100 housebuilder Barratt Developments (LSE: BDEV), which currently offers a prospective dividend yield of 8.6%. With a portfolio weight of 6.7% at the end of the September (vs 0.2% for the fund’s benchmark – the FTSE All-Share index), Woodford is clearly bullish on the investment case for Barratt.

Given Woodford’s reputation, do I think private investors would benefit from following the fund manager and loading up on the stock for the huge yield?

Be careful of high yields

I’m not so sure. I’m always wary of a stock’s yield when it is higher than around 6%-7%. When a yield is up near 9%, you have to ask yourself why it is so elevated. In other words, why is the share price so low that it has pushed the yield up so high?

Should you invest £1,000 in Anglo American right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Anglo American made the list?

See the 6 stocks

In Barratt’s case, investors are no doubt concerned about the state of the UK housing market, and this has pushed the P/E ratio down and the yield up. Even though we have a shortage of affordable housing in the UK, Brexit uncertainty, rising interest rates, increasing construction costs and high levels of consumer debt are all threats to demand growth. A recent profit warning from peer Crest Nicholson won’t have helped sentiment towards the stock.

A downturn in the UK’s housing market could have disastrous implications for Barratt’s dividend. Looking at the group’s dividend history, the group paid no dividend at all between 2008 and 2012 after the Global Financial Crisis (GFC) hit the UK housing market hard. Investors should note that the stock’s forecast dividend coverage ratio of 1.6 times is not that high. 

There’s no sign that a dividend cut at Barratt is on the cards in the near future. Recently, the group raised its payout by 5% for the most recent financial year. However, there is an element of risk to the dividend going forward, in my view, especially with Brexit unknowns. As such, I’m happy to ignore Barratt’s high yield for now and focus on other, more dependable, dividend stocks.

Better dividend stock?

One I’d be more likely to buy right now is FTSE 250-listed merchant bank Close Brothers Group (LSE: CBG). The reason I say this is that the group has an excellent dividend growth track record and managed to hold its dividend steady during the GFC as other banks such as Lloyds and RBS were slashing their payouts left, right and centre. And since the GFC passed, the bank has notched up eight consecutive dividend increases, registering dividend growth of 62%, which is an excellent achievement.

CBG’s dividend yield certainly isn’t as high as Barratt’s. With analysts expecting a payout of 65.8p per share for the year ending 31 July 2019, the prospective yield is ‘only’ 4.5%. However, when you consider the company’s diversified business model, its dividend growth history, and also the level of dividend coverage (which is very solid at a forecast 2.1 times), there’s a lot of appeal in that yield in today’s low-interest-rate environment, in my opinion.

The last time I covered Close Brothers back in late September, the shares were up around 1,600p. However, after the recent market sell-off, they’re back at 1,465p which puts the stock on a forward P/E of 10.5. I think that’s a fair price to pay for a slice of this high-quality, dividend-paying bank.

Should you buy Anglo American now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Edward Sheldon owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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

These 4 FTSE shares have crashed hard. Which do I like today?

These four FTSE 100 stocks have plunged in value over the last month. But after this latest market meltdown, which…

Read more »

Investing Articles

1 FTSE 250 stock that analysts are calling a ‘Strong Buy’

The FTSE 250 can be overlooked by investors, but analysts believe this stock in particular could be undervalued by as…

Read more »

Close up of a group of friends enjoying a movie in the cinema
Investing Articles

I asked ChatGPT to name 5 FTSE shares for the perfect SIPP. Here’s what it picked

Harvey Jones called on ChatGPT to help him decide which shares would be right to buy for a well-balanced SIPP.…

Read more »

Investing Articles

Should I load up on Rolls-Royce shares after the 17% drop?

Rolls-Royce shares have pulled back sharply in the FTSE 100 in recent weeks, leaving this Fool to wonder if he…

Read more »

Investing Articles

Is this the best S&P 500 stock to consider buying in these volatile times?

With bullion prices still rocketing, I think buying the S&P 500's only gold stock is worth serious consideration right now.

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Yielding 7.25% but with a P/E of 186x! What’s up with the BP share price?

Harvey Jones thought the BP share price was a brilliant bargain but it's only brought him a world of trouble.…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

Down 26% with a 7% yield! Could this little-known FTSE 250 gem make a comeback?

Mark Hartley considers the long-term prospects of FTSE 250 recruiter Page Group. Weak results have sent the price tumbling but…

Read more »

Investing Articles

Analysts are calling Diageo shares a strong buy! Are they mad?

Analysts still have faith in Diageo shares, with 10 of them giving it the highest possible stock rating. Harvey Jones…

Read more »