The FTSE 100’s Hottest Dividend Picks: Barclays PLC

Today I am highlighting why I consider Barclays (LSE: BARC) (NYSE: BCS.US) to be a tremendous income selection.

Dividend growth back in focus

Due to the impact of capital building requirements, British banking institution Barclays was forced to keep its dividend payment on hold at 6.5p last year. But even in light of last year’s hiatus, the company has lifted rewards at a compound annual growth rate of 30% since 2009, and analysts expect the institution to get growth kicking higher again from this year.

Indeed, current projections point to a solid 20% rise to 7.7p per share for 2014, with an additional 40% increase — to 10.7p — forecast for next year.

These figures create an appetising, if unspectacular, yield of 3.7% for this year, beating a prospective average of 3.2% for both the FTSE 100 and the complete banking sector. But next year’s sizeable increase pushes the yield to a very decent 5%.

Bank to hurdle current legal issues

Make no mistake: Barclays faces a number of battles which could significantly crimp earnings in coming years.

From allegations of fixing the Libor and gold markets, through to mis-selling payment protection insurance and interest rate hedging Barclaysproducts, a multitude of legal problems has battered the bank’s reputation in recent years.

And the problems are not going away — the latest scandal facing the bank relates to allegations by the US attorney general last month that the firm had misled investors engaged in ‘dark pool’ trading operations.

Despite these problems, however, the City’s number crunchers expect the company to record stunning earnings expansion to the tune of 39% in 2014, and a further 23% next year. For income investors these projections leave predicted payments well covered — indeed, coverage of 3 times and 2.7 times forecast earnings comfortably soar above the safety benchmark of 2 times.

Barclays has undergone extensive restructuring through its ongoing Transform programme, creating a more streamlined proposition by shedding and downscaling underperforming and high-risk assets such as its investment arm. Meanwhile the bank’s expense-slashing drive — which includes the shuttering of scores of branches up and down the country — continues, and the bank currently expects underlying costs to fall to £16.3bn by the end of next year from £18.5bn in 2013.

With the UK’s economic recovery really starting to click through the gears, the country’s high street banks are poised to enjoy the fruits of rapidly-improving conditions for both private and business customers. With Barclays’ huge technological drive also boosting its position in the red-hot areas of online banking and ‘swipe’ technologies, I believe that the firm should continue enjoying strong earnings and dividend growth in coming years.

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Royston Wild has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.