Barclays (LSE:BARC) shares currently offer a dividend yield just under 5.8% — that’s almost 2% higher than the FTSE 100 average. As such, Barclays’ juicy passive income payouts might pique the interest of dividend investors seeking banking sector exposure in their portfolios.
The stock’s yield has risen rapidly over the past couple of days following a 9% share price fall since Barclays released its Q3 results. Despite a concerning profit drop, the Blue Eagle Bank shows no intention of slashing the dividend — at least for now.
So, how many shares would I need to buy for a second income of £100 a month? Moreover, what risks and opportunities does the lender face today? Here’s my take.
Dividend income
Although Barclays offers an attractive yield relative to many FTSE 100 shares, it’s worth noting the bank’s track record on shareholder distributions is chequered. Dividends were slashed due to the 2008 financial crisis and, more recently, payouts were halted in 2020 during the pandemic.
Since the banking industry’s cyclical, potential investors should anticipate fluctuations in dividends they receive from an investment in Barclays shares, as well as other bank stocks too — history suggests as much.
As I write, the Barclays share price stands at £1.31. Accordingly, to secure £1,200 in annual dividend income at today’s yield, I’d need 15,849 shares for a grand total of around £20,762. Using the forecast dividend yield of 7.4% instead, I’d only need 12,379 shares, which would cost me £16,216.
For many investors, these would be significant sums to invest in a single stock. Regarding my own portfolio, I’d prefer to diversify my positions across a variety of companies and sectors. Still, it’s a useful indication of how many Barclays shares I’d need to target a three-figure monthly income.
The share price outlook
Although the yield looks tempting, there are several major risks facing the lender. The group’s investment banking division continues to struggle, contributing to the 16% net profit slump during Q3 to £1.27bn.
Furthermore, there are signs that tailwinds for Barclays shares from the high interest rate environment are beginning to dissipate. The bank now expects its net interest margin will be between 3.05% and 3.1% in 2023, down from previous guidance of 3.15%-3.2%.
With pressure on margins increasing, the board’s taking steps to streamline the group’s operations. Cost-cutting, capital reallocation, and restructuring are all key near-term goals. However, the bank’s already made headcount cuts recently. Whether it can successfully deliver further efficiency savings without impacting service quality remains to be seen.
Nonetheless, potential investors have good reasons to believe these risks could be handsomely compensated by the stock’s attractive valuation. At present, Barclays sports a price-to-earnings (P/E) ratio of around 3.8 and a price-to-book (P/B) ratio of 0.36. Both figures are currently below their five-year averages.
A stock to buy?
Overall, Barclays shares have plenty to offer passive income investors, but dividend cuts can’t be ruled out if the bank continues to struggle.
The Q3 earnings disappointment is enough to dissuade me from investing today. Plus, I already have exposure to the sector via Lloyds shares. Instead, I’m turning my attention to HSBC‘s results next week as I continue to search for another bank stock to add to my portfolio.
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HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Charlie Carman has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, and Lloyds Banking Group Plc. 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.
