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Many FTSE 100 stocks look like great buys for passive income. Recent market volatility leaves them with forward dividend yields far north of the index’s 3.6% forward average.
Yet despite some strong yields (and low price-to-earnings (P/E) ratios) some UK blue-chip shares remain too risky right now.
Barclays (LSE:BARC) is one FTSE income share I’m not tempted to buy, for instance. Not even its chunky 5.6% dividend yield for 2023 is enough to encourage me to invest.
Loan impairments continue to rise across the banking sector as the UK economy struggles. It’s possible that the entire industry could be sitting on a debt timebomb as interest rates rise and the cost-of-living crisis endures.
The Money Advice Trust charity says that the average level of ‘priority’ debts has soared 54% since 2018. The data — which covers bills like council tax, energy costs, and rents — underlines the growing strain people face to make ends meet. Banks could also struggle to claw back money from cash-strapped businesses, of course.
Rising competitive pressures are another threat to Barclays. Savers are exiting en masse to find better returns on their money. And the pressure is growing on other parts of their businesses.
In the mortgage market, for instance, Skipton Building Dociety has just introduced a no-deposit product aimed at renters. Competition amongst home loan providers is heating up and is a major threat to Barclays, the UK’s fifth-biggest mortgage lender.
It’s worth remembering that Barclays also has considerable exposure to the US and a large investment bank. This could help it to grow profits even if economic conditions in Britain remain challenging.
But on balance I think the risks of owning the FTSE bank outweigh the potential rewards. This is why its shares trade at rock-bottom prices (Barclays’ shares trade on a P/E ratio of 4.8 times for 2023).
The increasingly competitive mortgage market is a good thing for homebuilders like Berkeley Group (LSE:BKG), however. In fact it’s helping the housing market recover following the lows of late last year.
It’s too early to claim that the crisis is over. Homebuyer demand could come under fresh stress as interest rates rise, putting borrower affordability under additional strain.
The Bank of England is tipped to raise its benchmark to 4.5% tomorrow (11 May). And the market is increasingly pricing in a peak rate of 5% in 2023.
However, over a long horizon I still expect Berkeley to deliver exceptional long-term returns for investors. Home construction is weakening and, if it continues, could significantly worsen an existing shortage of homes in the UK.
At the same time demand is expected to grow as the domestic population steadily rises. Buyer appetite is tipped to increase especially strongly in Berkeley’s chosen regions of London and the South-East.
I think the near-term threats facing the company is baked into its low earnings multiple. Today the FTSE company trades on a forward P/E ratio of 10.5 times. And with the business also carrying a 5.1% dividend yield I’ll consider opening a position here when I have spare cash to invest.