It isn’t enough just to look for stocks with big yields when trying to make a passive income. Some of the largest yields come from companies that are very susceptible to wild profits swings. Such shares can’t be relied upon to generate income-boosting dividends year after year.
Take Russia-focused steelmaker and mining company Evraz (LSE: EVR). This FTSE 100 firm has slumped in recent weeks as Russian troops have gathered on the borders of Ukraine. Fears that production could be disrupted (it also operates mining assets in Ukraine), and may have trouble selling its product if Russia is hit with sanctions, have sent investors running.
Evraz’s sinking share price has in turn sent its dividend yield through the roof. It currently sits at a jaw-dropping 38.2%! This is a warning sign that the City’s dividend forecasts could be looking a tad stretched. Conflict in Europe isn’t the only threat to Evraz’s profits, either. Over the long term earnings and dividends could suffer significantly whenever the global economy slows and revenues dip.
A better FTSE 100 stock for a passive income
I’m not saying that Evraz isn’t worth investing in today. Its share price would likely soar if a Russia-Ukraine conflict can be averted. And in the years ahead it could generate big profits as huge infrastructure spending across the globe turbocharges demand for its metal. I simply don’t think it is a secure stock to buy if one is hunting a stable passive income.
There are many other big-yielding shares out there I think could help me generate a solid passive income. FTSE 100 construction giant Barratt Developments (LSE: BDEV) is one I’d happily spend £1,000 on today.
7.5% dividend yields!
Housebuilder Barratt is a dividend stock I actually bought several years back. And in that time it’s helped boost my passive income significantly. Demand for its new-build homes has soared in recent years thanks to the support of low interest rates and government schemes like Help to Buy. At the same time, a lack of meaningful supply has pushed property prices through the roof.
Profits have risen steadily (excluding the shock in 2020 when Covid-19 hit construction rates and sales) at Barratt. And as a consequence, the company’s had the financial firepower to pay dividends way above the market average. It’s a theme I’m expecting to continue too. Indeed, for this year (to June 2022) Barratt’s yield sits at a mighty 6.4%, way above the 3.5% FTSE 100 average. And for financial 2023 the yield jumps to 7.5%!
Latest data on the UK homes market reinforces my confidence that Barratt could remain a great dividend stock to own too. According to Rightmove, asking prices for new homes entering the market has risen 2.3% year-on-year in February. This is the highest rate of growth for at least 20 years.
Like Evraz — or indeed any other UK share — Barratt does of course expose its investors like me to some risk. The withdrawal of Help to Buy next year could hit homes demand in the years ahead, and by extension the passive income I could receive. But it’s my opinion that the potential rewards on offer from owning this FTSE 100 stock outweigh the dangers. I’d happily spend another £1,000 on the company today.