One dividend stock I’d buy right now, and one I’d avoid

Bilaal Mohamed pits one UK-based housebuilder against another. But who comes out on top?

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These are certainly interesting times for the UK’s leading housebuilders. The increased economic uncertainty following the result of last year’s EU referendum has thrown up all manner of forecasts and predictions, ranging from the optimistic to the downright grim. But where do I stand on the matter?

Brexit was a mistake

Generally speaking, I believe Brexit was a mistake, and I fear the UK economy will suffer in the long run. That said, my pessimism doesn’t extend to the UK housebuilding sector. Indeed, all the housebuilders I tipped following the EU referendum have gone on to post spectacular share price gains. So well done to those who were paying attention. But what about those who missed out on the recovery, surely it’s too late?

Not necessarily. Granted, the sector is exposed to increased uncertainty and hence risk, but the housing demand and supply fundamentals remain the same. There is a shortage of affordable housing in this country, and consumer demand has remained resilient since last year’s referendum. Our leading housebuilders are still paying out very generous dividends and I’m still pretty bullish on them all – except for one.

Now it’s different

Some of you will remember me singing the praises of Bovis Homes (LSE: BVS) last October. I remarked that the Kent-based developer was likely to break the £1bn revenue barrier in 2016, and that it would continue to hike its full-year dividend payouts. Both of those forecasts transpired, and the share price has climbed 30% since my recommendation on 26 October. But 10 months on, things are a little different.

Earlier this year the FTSE 250 group reported a 3% dip in pre-tax profits, as it was forced to pay compensation to customers as a result of poorly-built homes. The company has since put in place a taskforce to address the issues, with a £10.5m provision to cover the cost of any remedial work and to pay appropriate compensation to affected customers.

Takeover bids

The company is now slowing its rate of production and targeting completion volumes for 2017 to be around 10%-15% below the 2016 level. This is likely to have a significant impact on profitability. The Chief Executive, David Richie, has since resigned, and the company has rejected takeover bids from rivals Redrow and Galliford Try.

I certainly wouldn’t deter existing shareholders from holding onto their shares for the long term, but I think new investors should seek out other alternatives given Bovis’s current issues.

A better alternative?

A good place to start could perhaps be Taylor Wimpey (LSE: TW). The top-tier residential developer gave a pretty good account of itself earlier this month when it announced its half-year results for the first six months of 2017.

Trading through the first half has been very positive, supported by favourable UK housing market fundamentals and good customer confidence. A special dividend of 10.4p per share was announced in addition to the regular interim dividend which itself was hiked to 2.3p per share.

The prospective yield now stands at 7.1%, rising to 7.8% next year, and the shares are available at a bargain 10 times forecast earnings, falling to just nine times for 2018.

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.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Redrow. 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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