The FTSE 100 is a great place for dividends. The index is filled with quality companies, many of which pay me a passive income just for holding stock in them. Here’s one that could give me £100 a month if I bought 3,343 shares.
£100 a month
Barratt Developments (LSE: BDEV) is one of the UK’s largest housebuilders. It builds homes across the country (around 18,000 last year) and its earnings are used to offer shareholders a very nice payout.
Let’s say I want a £100 monthly income here. I can start with that amount, then work backwards to figure out exactly how many shares I’d need to get there.
In Barrat’s case, I’m looking at an 8.93% yield, which is the return as a percentage over the last 12 months. Using this, I’d need a £13,438 stake. At £4.02 per share, that works out to about 3343 shares.
In simple terms then, I’m investing around £13,000 to get £1,200 back per year. I’m more than impressed with that return. Honestly, if I could rely on it year after year, I’d buy it in a heartbeat.
Up to 18%
Before I get carried away, let’s look at the risks here. Because I find it easy to get overwhelmed by pound signs in my eyes as I’m calculating a bumper return, but the thing is, dividends don’t happen in a vacuum.
For one, that 8.67% yield is for a single year. To get a better picture, I’d need to look at other years too. Barratt’s 2022 payout of 9.81% was pretty good, but 2021 was 3.93%, 2019 was 4.09%, and in 2020 all payments were cut due to the Covid pandemic. It means a yield of close to 9% is, shall we say, not ‘safe as houses’.
This is a danger with high dividends. They can be deceptive, like fool’s gold. Another housebuilder, Persimmon, was offering a massive 18% payout at one point last year. It didn’t last, of course, and now that has been slashed to less than 5%.
In general, anything over 8% in dividends should set alarm bells ringing. Out of the Footsie companies that offer that much right now, not a single one paid it three years ago. This isn’t to say high dividends aren’t good, just that I don’t think it’s wise to pick shares based on whoever’s got the highest payout that day.
Am I buying?
With all this in mind, is Barratt a buy for me? Well, it does offer a tidy dividend, even if I don’t think it will stay as high as it is right now. Also, the stock is down 49% since 2021, which could mean a time to get in on the cheap.
The trouble is, the next few years could be rough for housebuilders. The stamp duty holiday in the UK has ended, and the cost-of-living crisis isn’t helping people save money to buy a house. Rising interest rates will have an impact on mortgages too.
This is normal for the housing industry, which is cyclical. But in the medium term, it’s hard for me to see this being a great buy. I’ll steer clear for now.
