5.2% and 7% dividend yields! Should I buy these cheap FTSE 100 shares?

I’m searching for some great cheap FTSE 100 stocks to add to my portfolio. Here are two big-dividend-paying blue chips that have caught my eye.

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I’m searching for the best cheap FTSE 100 stocks to buy following recent market volatility. Here are two top shares whose big dividend yields have caught my attention.

Barclays gets battered

Heavy weakness for the Barclays (LSE: BARC) share price means the bank now trades on a forward price-to-earnings ratio of 5.8 times. It also means the FTSE 100 firm carries a mighty 5.2% dividend yield.

Fans of Barclays would argue that this recent price reversal provides a chance to grab a bargain. Profits from Barclays’ lending activities look set to rise sharply as the Bank of England increases interest rates. Higher rates increase the difference between what Barclays et al provide to savers and to borrowers. And analysts think the Bank of England will raise interest rates a further four times in 2022 alone.

However, the rate at which inflation is rising means that interest rates could well exceed those levels. Panmure Gordon chief economist Simon French has said that inflation could hit 10% because of rising energy costs. This could increase pressure on the Bank of England to supercharge rate rises in a boost to the banks.

It’s my opinion, though, that the benefits of higher interest rates don’t outweigh the other threats to Barclays’ earnings. I worry about how sanctions on Russia could hit the already-fragile economic recovery in the bank’s UK and US markets. I’m also concerned by the impact of soaring inflation on its activities, as well as the growing danger posed by challenger banks.

I’m worried by the outlook for Barclays’ huge investment bank as well. Stock markets are sinking and they could continue doing so as concerns over the macroeconomic and geopolitical environment ratchet up, hitting profits here in the process. The Barclays share price looks amazingly cheap. But I believe the company’s low price is an indication of its high risk profile.

A cheap FTSE 100 stock I’d rather buy

I’d much rather invest in Barratt Developments (LSE: BDEV) today. This FTSE 100 share trades on a P/E ratio of 6.9 times for this financial year (to June 2022). This makes it slightly less attractive on paper than Barclays. However, the housebuilder’s superior 7% dividend yield makes up for this.

The Barratt share price has dropped 18% in the past six weeks. And as a long-term investor I think this could provide a great dip buying opportunity. The risks have risen for the business following tragic events in Ukraine. The conflict is worsening inflationary pressure and, as a result, raising the chances of multiple rate hikes by the Bank of England. This has the potential to hit buyer demand hard.

As things stand, however, I believe the profits outlook for Barratt and its peers remains robust. The pressure on buyer affordability is worsening but so far sales at the company remains robust. Indeed, last month Barratt raised its completion target for this year thanks in part to its “strong” order book. I for one believe demand for its newbuilds should remain strong given the ongoing lack of total new homes supply in the UK, pushing profits higher in the process.

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.

Royston Wild owns Barratt Developments. 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.

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