These housebuilders offer strong dividend yields! Which one is best for my portfolio?

Housebuilding stocks are offering some of the best dividend yields on the index. So, which stock is best for my portfolio?

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Mother, father and child girl in new house with a cardbox roof. Symbol of protection and property.

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Housebuilder stocks are a great place to look for attractive dividend yields. In fact, Persimmon (LSE:PSN) is the highest-paying stock on the FTSE 100. Buying at today’s price, I could expect a whopping 11% yield from this dividend big hitter. But, other housebuilders, including Crest Nicholson (LSE:CRST), Vistry Group (LSE:VTY), Barratt Developments (LSE:BDEV), Taylor Wimpey (LSE:TW), and Redrow (LSE:RDW) are offering strong yields too. So, which one is the best pick for my portfolio?

Valuations

The share prices of housebuilders have been on a downward track this year amid rising inflation, higher interest rates, and a cost of living crisis. The cost of fixing the cladding crisis has also weighed on share prices. However, this comes on the back of a very strong year for housebuilders. This means we’re seeing some fairly low price-to-earnings (P/E) ratios based on the past year’s earnings.

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StockP/E ratio
Crest Nicholson 7.1
Barratt Developments7.4
Persimmon8.4
Taylor Wimpey6.95
Redrow6.85
Vistry Group 6.28

While these figures are based on the previous year’s earnings and the current share price, it should be fairly indicative as demand for new homes has remained strong so far this year. Many companies have also noted a strong forward order book.

Dividends

As discussed, I think housebuilder stocks are a good place to look for strong dividend yields. Here’s how these six companies stack up at today’s prices.

StockDividend yield
Crest Nicholson 5.6%
Barratt Developments6%
Persimmon11%
Taylor Wimpey6.8%
Redrow4.8%
Vistry Group7.45%

While Persimmon might appear like the clear winner here, it’s important to note that sizeable dividends are not always sustainable. The dividend coverage ratio is a good place to look to see whether a stock can afford to pay its dividend.

StockDividend coverage ratio (2021)
Crest Nicholson 2.5
Barratt Developments2.21
Persimmon1.06
Taylor Wimpey2.10
Redrow3.01
Vistry Group2.09

The ratio indicates how many times the company can pay its stated dividend from its net income. The data above suggests that Persimmon’s dividend is least sustainable, while Redrow’s dividend is most sustainable. It’s worth noting that the reporting periods for the dividend coverage ratios are do not match perfectly but provide a good idea of the comparative sustainability.

Cladding costs

The government has made housebuilders sign up to a fire safety pledge that sees them put money aside to reclad houses and flats built using dangerous materials. The costs are pretty substantial. The below figures are the most recent provided by housebuilders, combining money already put aside and estimates for future work.

StockCost of pledge
Crest Nicholson £127m-£167m
Barratt Developments£350m-£400m
Persimmon£75m
Taylor Wimpey£245m
Redrow£200m
Vistry Group£50m-£70m

Which one is best for my portfolio?

It’s certainly worth noting that there could be downward pressure on the housing market this year and next. And this could further impact share price. However, I feel housing stocks are already quite depressed and I’m bullish on long-term demand for property in the UK.

My top pick is Vistry Group. It beat its pre-pandemic performance but some distance last year and said it was in a strong position for further growth in 2022. Its sizeable dividend is also well covered. I’ve bought Vistry Group shares and would buy more.

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James Fox owns shares in Crest Nicholson, Vistry Group and Barratt Developments. 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.

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.

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