Barclays (LSE: BARC) shares are in demand right now. They were hit harder by the banking crisis than the shares of other FTSE 100 banks, and investors sense an opportunity. So do I. They’re dirt cheap right now and the dividend yield is high and climbing.
Buying Barclays shares is nonetheless an act of faith. Before the financial crisis, they peaked at around 600p. Ten years ago, they traded at 272p. Today I can buy them for around 158p, although they have climbed 6% in the last year.
That shows the huge long-term damage the banking crisis inflicted on the sector. It’s a lesson worth remembering, given that just a few short weeks ago, we were staring down the barrel of a new one.
I’m hunting for value and dividends
Defensive measures taken during the financial crisis appear to be holding, at least for now. The downside is that Barclays has more exposure to international contagion than Lloyds Banking Group and NatWest Group, through its investment banking division.
There is now a growing sense that inflation will soon start falling, but this may prove a mixed bag for the banks. While lower interest rates will reduce the chances of a banking crisis or house price crash, it will also squeeze their net interest margins. That’s the difference between what they pay savers and charge borrowers.
Whatever happens to inflation and interest rates, I don’t see it laying the groundwork for a banking stocks boom. Despite that, I would still buy Barclays shares. They just look too good to miss, at today’s valuation of only five times earnings. The price-to-book value also screams cheap at just 0.3 (where a figure of 1 equals fair value).
It’s the dividend that really tempts me, though. Barclays stock currently yields 4.7%, covered by a generous 4.2 times earnings. Next year, the yield is forecast to be 5.9%, and cover will still be more than comfortable at 3.7 times, offering scope for further progression.
Here’s what I’d get today
Based on 2022’s dividend per share of 7.25p, I would need to buy 16,552 Barclays shares to generate income of £1,200 a year, or £100 a month. That would cost me a meaty £26,151, though, which is more than my annual Stocks and Shares ISA allowance.
Sadly, I don’t have that kind of money to hand and even if I did, I wouldn’t invest that much in just one company. My portfolio would become too heavily weighted to this one stock.
However, if I invested, say, £5,000 in Barclays, I would still get income of £230 this year, which works out at just over £19 a month. If that 5.9% forecast yield is correct, that will rise to £295 next year, or nearly £25 a month.
Dividends are never guaranteed, of course. Barclays has to generate sufficient cash to sustain them. If it can do this, my monthly income will rise over time, especially since I will reinvest my dividends back into its stock to steadily increase my stake.
There are risks, obviously, but given the Barclays shares low valuation and high yield, I think they are worth taking.
