One of the few certainties in life is that we all need housing. So investing in buy-to-let property might seem like a sure-fire winner.
The problem is that with the help of ultra-low interest rates, a huge amount of money has flowed into housing since the financial crisis. This has pushed up house prices, adding to the rising costs faced by landlords.
In my view, it makes more sense to gain exposure to the housing market through dividend stocks held in a tax-free Stocks and Shares ISA. Today I’m going to take a look at two companies that are on my radar at the moment.
#1 – profit from plumbing
FTSE 100 firm Ferguson (LSE: FERG) was previously known as Wolseley. The plumbing, heating and building material supplier’s name change was part of a shift towards the US market, which now generates more than 90% of profits.
Ferguson shares have fallen by about 25% over the last six months, as investors have started to worry about the risk of a slowdown in the US housing market. But these fears are starting to look overdone to me.
The group’s latest accounts show that sales rose by 8.2% to $10,847m during the six months to 31 January, while underlying operating profit rose by 7.7% to $744m.
Even if housebuilding activity does slow, I’ve seen nothing to suggest that we’re heading for a repeat of the 2008/09 crash. What seems more likely is a modest slowdown. If that happens, I don’t think Ferguson shareholders need to worry too much.
The group’s debt levels look comfortable to me and the shares seem increasingly affordable, trading on 12 times 2019 forecast earnings, with a 3.3% dividend yield. For long-term investors, I think this could be a good time to start buying.
#2 – a top UK housebuilder
When writing about housebuilders, it’s easy to focus on eye-catching figures like dividend yield and cash balances. But what about the quality of the houses built by each company?
Some recent news has made me think more about this. Last week, FTSE 100 builder Persimmon said that it would allow buyers’ solicitors to hold back 1.5% of the purchase price of each new home until any faults had been rectified.
Why is this necessary? I can only guess that lots of Persimmon homes may be poorly finished. Indeed, looking at the latest Home Builders Federation ratings, I see that the firm only managed a three-star rating in the latest customer survey.
Persimmon currently boasts a 29% operating profit margin, one of the highest in the sector. But its customers appear to have mixed feelings about the quality of their homes.
In contrast, FTSE 250 firm Bellway (LSE: BWY) recently received a five-star HBF rating for the third consecutive year. Bellway’s operating margin is lower, at 22%, but its customers appear to be very happy with their new homes.
How should this affect us as investors? I feel that over the longer term, Bellway’s focus on build quality and customer satisfaction might be good news for anyone committing their investment cash to the firm.
Although the group’s 2019 forecast dividend yield of 5% is lower than some rivals, broker forecasts suggest it should be covered nearly three times by earnings this year. That means that even if earnings slow after Brexit, Bellway’s dividend should remain affordable. I’d rate the shares as a buy.
