Buying dividend stocks can be a lucrative investment strategy. After all, who doesn’t like earning regular passive income payouts?
Two of the FTSE 100 index’s highest-yielding shares are global commodities trader Glencore (LSE:GLEN) and Britain’s largest housebuilder Barratt Developments (LSE:BDEV). Both companies offer potentially attractive rewards, but they face challenges too.
So, should I add this pair of dividend shares to my portfolio? Let’s explore.
Glencore
This commodities giant offers an 8.1% dividend yield. The Glencore share price has risen 20% over the past five years.
Booming commodity prices have benefitted the company in recent years, translating into record earnings for FY22. Over the past three years, Glencore trebled its adjusted EBITDA to $34.1bn and almost eradicated net debt from its balance sheet. Net debt fell to just $0.1bn at the end of last year from $15.8bn in FY20.
Geographic diversification is an attractive feature of the company. Glencore has operations in every continent except Antarctica. In addition, significant change is under way regarding the firm’s focus. Global agribusiness merchant Bunge is set to buy Glencore-backed grain handling company Vtierra for $8.2bn.
The deal will equip Glencore with greater financial resources at a critical time. The company is currently making a bid for Canadian steelmaking coal, copper, and zinc producer Teck Resources. Some analysts are interpreting the move as an effort to boost its exposure to renewable energy metals like copper.
Indeed, the company’s reliance on coal is a key risk in an increasingly environmentally-conscious world. There’s also turbulence surrounding Glencore’s top brass. Activist shareholder Bluebell Capital Partners has called for CEO Gary Nagle’s removal, which could produce near-term share price volatility.
Despite the challenges, Glencore looks attractively valued to me with a price-to-earnings ratio of 4.15. If I had spare cash, I’d buy this dividend stock today.
Barratt Developments
The UK’s largest housebuilder by revenue and dwelling completions offers an 8.6% dividend yield. The Barratt Developments share price has slumped 20% over five years.
There are considerable headwinds facing homebuilders like Barratt. Spiralling mortgage rates and falling house prices can weigh on order books and squeeze profit margins.
That said, Britain’s chronic housing shortage is well-documented. Investors will need to balance the housing market’s troubles against secular forces driving long-term demand for new homes in their assessment of the stock’s suitability for their portfolios.
Barratt anticipates it will deliver between 16,500 and 17,000 home completions this financial year. This would represent up to 1,400 fewer than the prior year. The company also expects to turn a healthy £877m profit, but this too is a decline from £1.05bn in 2022.
Cautious investors will note the company’s FTSE 100 rival Persimmon slashed its dividend by 75% this year, which might indicate Barratt’s dividend could also be trimmed. However, it’s currently covered by 2.2 times earnings. As things stand, it looks reasonably safe, but if the house price downturn is deeper than expected, things can change quickly.
Overall, I think the long-term prospects for the company look promising, but there are plenty of near-term challenges that are likely to cause headaches. If I didn’t already own shares in Taylor Wimpey I’d consider investing today, but I don’t want to be too exposed to the sector at present.
