Should I buy Barclays shares for the passive income?

Barclays shares offer a handsome yield. But should this Fool buy the stock just for that? He explains why he thinks there’s more to it.

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Barclays (LSE: BARC) shares look dirt cheap with a meaty dividend yield. Are they a no-brainer buy for my portfolio?

The stocks gained some momentum this year, which as a shareholder I’m delighted to see. But I still can’t shake the feeling that the Blue Eagle bank is severely undervalued.

It yields 4.6%. That’s above the FTSE 100 average. What’s more, it’s forecasted to keep rising in the next two years. Should I buy shares for the passive income opportunity alone? Of course, forecasts can change.

A sustainable yield?

If I’m buying Barclays for some extra cash, I want to make sure its dividend is sustainable. The pandemic was a stark reminder of the fact that dividends are never guaranteed. I don’t want to pile into the stock now only to get stung further down the line.

Well, luckily, I don’t think that’s likely. Firstly, that’s because the payout is covered over three times by trailing earnings. Secondly, the business has announced its plans to increase shareholder returns in the years ahead.

By 2026, it’s set to return £10bn through a combination of dividends and share buybacks. With plans to keep its total dividend stable at the current level in “absolute terms”, this means growth will come from fewer shares being in circulation due to buybacks.

A strategic overhaul

Of course, there’s no point in targeting a stock solely for its yield if a falling share price wipes out my gains, which is a threat.

On the one hand, we’re not out of the woods yet. I think 2024 could be choppy for UK banks. High interest rates will continue to pose a challenge. After all, the bank reported lower profits in 2023 and £900m in restructuring costs will make a dent. The UK economy isn’t expected to grow much this year, either.

That said, on the other hand, I see plenty to like about Barclays at its current price, and I see long-term value.

Restructuring plans will be a costly endeavour in the near term, but streamlining its operations into five divisions should help it overcome issues that have held it back for years. By 2026, it’s aiming for £2bn in savings.

Its latest strategic overhaul is the first of its kind since nearly a decade ago. With that in mind, I think the future of the business under leader CS Venkatakrishnan looks bright.

On top of that, the stock looks cheap. Its trailing price-to-earnings ratio sits at around six, below the FTSE 100 average of 10.5. Its price-to-book ratio is just 0.4.

Time to buy?

So, would I buy Barclays for the passive income opportunity? Yes, if I had the spare cash. But that’s not the only reason.

At 177.9p, I think the stock could be a shrewd buy. The firm may continue to struggle in the months to come. But I’m bullish on the performance of banking stocks in the years ahead.

I’m up 24.2% with my Barclays position but I don’t plan on stopping here. I’ll be buying more shares with any investable funds in the weeks ahead.

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.

Charlie Keough has positions in Barclays Plc. The Motley Fool UK has recommended Barclays Plc. 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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