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Why I’d avoid Barclays plc and buy this 8% dividend yield instead

I’m not a fan of Barclays (LSE: BARC). I haven’t been for some time now. And late October’s very disappointing trading update gave me even more reason to dislike the banking giant.

The share has dived to one-year lows in the wake of news that revenues disappointed for the first nine months of 2017. Total income fell 2% in between January and September, to £16.1bn, driven by a 14% top-line decline at its investment banking division which it said was “due to lower market volatility and the impact of exiting energy-related commodities” and “lower equity derivatives revenue.”

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Loaded with risk

Despite these worrying trading signals, City consensus suggests that earnings are on a path of sustained upward momentum — profits are predicted to boom 31% and 25% in 2017 and 2018 respectively.

And as such the Footsie giant could be considered brilliant value, rocking up on a prospective P/E multiple of just 10.8 times.

Meanwhile, current City forecasts suggest that dividends are about to detonate in tandem with earnings. The bank is predicted to hold the dividend at 3p per share in 2017, resulting in a 1.6% yield. But this is expected to jump to 6.3p next year, meaning that the yield registers at a pretty decent 3.5%.

But in my opinion, the risks to current earnings and dividend forecasts make Barclays an unattractive investment destination right now.

As if the problem of falling volumes and volatility at its investment arm is not enough for the firm to contend with, it also faces the prospect of sustained revenues turmoil and bad loans rising at its Barclays UK arm as the economy in its home market becomes more troublesome (revenues here sank 3% in January-September).

While Barclays avoided bulking up PPI provisions for the third quarter, a rise in claims across the industry more recently suggests that this — along with other litigation issues — could remain a headache for it for some time to come.

Motoring higher

Rather than settling for jam tomorrow, I reckon income seekers in particular should give Direct Line Insurance Group (LSE: DLG) serious consideration right now.

Helped by an anticipated 55% earnings increase in 2017, the insurance colossus is anticipated to shell out a 28.5p per share dividend. As a result, the FTSE 100 star sports a monster 7.9% yield.

A predicted 4% bottom-line dip in 2018 is expected to push the dividend slightly lower, to 28.2p.This projection still results in a mountainous 7.9% yield. And if today’s excellent trading update is anything to go by, I reckon current broker forecasts could receive healthy upgrades in the near future.

Direct Line advised today that gross written premiums rose 2.8% during July-September, to £907.2m, with the number of in-force policies rising 5.1% in the period to 6,838. The numbers illustrated the strength of the company’s brands across the motor, home business and car rescue segments, although its core motor division once again stole the show.

Gross written premiums here advanced 7.1% in the third quarter, to £462m, while the number of in-force policies jumped 5.5% year-on-year thanks to strong customer retention. And with premiums rising across the industry, the stage is set for the insurer to keep growing revenues at a healthy rate.

Despite Direct Line’s sunny profits picture, the company is still pretty cheap, the firm sporting a forward P/E ratio of just 10.9 times. I reckon this value is hard to overlook.

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