28% dividend increase! A no-brainer FTSE 250 stock to buy for passive income

This FTSE 250 stock provided an excellent trading update yesterday, which included a big dividend raise. These are the reasons I may add it to my portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A house being constructed in the countryside

Image source: Getty Images.

In these turbulent times, passive income becomes even more important. Therefore, I like to buy companies with healthy dividends. Healthy in this context means both fairly high yielding, yet also sustainable. Bellway (LSE: BWY) is one company I’m particularly keen on, especially after it announced a 28.6% hike in its interim dividend. This came after the FTSE 250 stock was able to report increased half-year profits. 

The numbers 

The half-year results for the housebuilder were strong across the board. Indeed, all the major metrics were up in comparison to the same period last year. This included a 3.5% year-on-year rise in revenues to £1.78bn and a 11.6% rise in operating profits to £332.2m. Profit margins were also able to increase by 1.4% to 18.7%, thanks to “price optimisation” and “disciplined cost control”. 

Most importantly, these strong results have also allowed larger shareholder returns, with the interim dividend up to 45p per share. Therefore, the total dividend for the year yields more than 5%, more than the majority of other FTSE 250 stocks. The dividend cover is also extremely strong, totalling around three times underlying earnings for the full financial year. This still allows investment into the rest of the company. By July 2024, it intends to reduce cover to around 2.5 times underlying earnings, which I feel is still perfectly sustainable, and will hopefully see the dividend continue to increase. 

Why did the Bellway share price still fall? 

Despite these excellent results, the Bellway share price still fell over 3% yesterday. This was mainly because there were some questions over the firm’s potential future liability for historical fire safety issues. As a result, Bellway has had to put aside £186.8m since 2017, and there are some fears that it may have to set aside more to fix fire safety issues over a longer timeframe. This may jeopardise the large dividend payouts. 

Further, although it has dealt with the issues of inflation well so far, CEO Jason Honeyman, expects further inflation, which will increase costs. Although there’s hope that this cost growth will be offset by the increasing cost of houses, there’s equally the worry that this will cause a lack of demand in the housing market. This would potentially see profits and the dividend decrease in the future. 

What am I doing with this FTSE 250 stock? 

So far, Bellway is performing excellently, and in the results, there’s no sign of any reduced demand. Indeed, as of March 2022, the forward order book was just under 7,500 homes, compared to 6,000 homes at the same time last year. Therefore, the fear that demand will wane is not based on official evidence. 

In addition, Bellway trades on a price-to-earnings ratio of under 7. This is very low and indicates that the housebuilder may be severely undervalued. For these reasons, I think this FTSE 250 stock is a no-brainer buy for me, and at its current price, may add some to my portfolio. 

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 considered so you should consider taking independent financial advice.

Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

GSK shares plummet 15% in a week! What’s going on here?

GSK shares had a bad time last week. They're down 15% as investors' sentiment soured ahead of litigation proceedings in…

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

Stock market recovery: have all the bubbles now burst?

Asset bubbles keep on coming, and here's what I'm doing to navigate through them and invest for the stock market…

Read more »

Shot of an young Indian businesswoman sitting alone in the office at night and using a digital tablet
Investing Articles

How I’d invest £290 a month in UK shares for a passive income that beats the State Pension

UK shares can offer a lucrative path for passive income. Our writer considers a plan to double his State Pension.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

3 of the best shares to buy now with £2,000

I reckon the best shares to buy now have strong growth in earnings and recent good news flow, such as…

Read more »

Young female analyst working at her desk in the office
Investing Articles

How I’m aiming for £500 a month in income from dividend stocks 

Here's my three-step plan for achieving a growing income from dividend stocks and three companies I'd use to help execute…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

UK shares are cheap! So why is Warren Buffett ignoring them and should you too?

Many British shares are trading cheaply and pay dividends. This is normally the hunting ground for Warren Buffett, yet he's…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How I’ve increased my passive income by 600%

Finding the right opportunities can bring spectacular results. Here’s how our author has managed to increase his monthly passive income…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Could lithium shares make my Stocks and Shares ISA a goldmine?

Our writer is considering buying lithium shares for his Stocks and Shares ISA. Here, he outlines the decision process he…

Read more »