There are some very tempting dividend yields on offer from FTSE 100 companies right now. But when I’m looking to generate a passive income stream, I’m cautious about jumping for the biggest ones.
Yes, a big yield could potentially build me a bigger pot sooner. But it has to be a stock that I think has a solid long-term dividend outlook, not just a one-off bumper payment.
I think Barratt Developments (LSE: BDEV) fits the bill. The housebuilder’s share price is down more than 40% over the past 12 months, but it’s starting to tick up again.
The share price fall has had one potentially beneficial effect for investors seeking passive income. It’s boosted Barratt’s forecast dividend yield, which now stands at 10%. We’re looking at a forecast price-to-earnings (P/E) ratio of only eight too.
Sector pressure
The whole housebuilding sector is under pressure as fears grow of house price falls. Lloyds Banking Group, for example, has predicted an 8% decline in 2023.
There’s something I think I can be reasonably confident about. Over the next 10 years, the Barratt Developments share price is very unlikely to remain static. And the dividend yield isn’t going to stay unchanged either.
So the calculations I’m doing here are not supposed to be a prediction. I’m just trying to show how buying dividend shares when they’re down can help with a quest for passive income.
Illustration
Over the longer term, I expect Barratt shares to regain their lost ground. If that happens, and the cash dividend remains the same, future investors would get a lower yield. So the amount needed to secure £100 per month in income will vary.
But for the purposes of illustration, I’m using the share price at the time of writing, which stands at 375p. And that just happens to make the numbers come out nice and round. With a 10% dividend yield, I’d need to invest £12,000 today to generate £100 per month in income. And that amounts to exactly 3,200 shares.
So an investor with £12,000 to spare could just buy those shares right now, and start pocketing their regular income. But what about those of us who can’t spare that much?
Regular investing
If I start investing £100 per month today, I could achieve my target investment amount in only about seven years. That’s assuming I reinvest all my dividends in more Barratt Developments shares. And, as I say, it’s based on today’s share price and dividend yield.
How far might this be from reality? We’re likely to have a rough year for property, and housebuilders will probably be squeezed a little. And I wouldn’t invest without considering all the risks, which I can’t really go into here.
But every time the housebuilding sector has suffered a cyclical downturn in the past, it’s come back strongly and gone on to renewed growth.
Long term
I see little chance of the UK’s chronic housing shortage ending any time soon. And though these specific figures are just an example of the possibilities, I do see the sector as a good one for generating long-term passive income.
