Investing in housebuilding stocks has proved an effective way for me to make a passive income down the years. And I continue to believe that stocks like Footsie share Berkeley Group (LSE: BKG) remains a great idea.
There’s a danger that the housing market could slow sharply as interest rates rise. But it’s my belief that the low valuations of the FTSE 100 housebuilders reflect this possibility. Berkeley, for instance, trades on a forward price-to-earnings (P/E) just above the bargain benchmark of 10 times.
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I like Berkeley in particular because of its focus on London and the Southeast. The UK capital has been an economic, social and cultural hotspot for centuries and will continue to be so. So I’m tipping house price growth in and around the region to remain rock-solid.
To illustrate the point, a report by insurer Direct Line shows that the average first-time buyer in London now needs to pay £223,751 to get on the property ladder. That’s almost 25% more than they had to fork out just six years ago.
I expect these strong price increases to continue, even if growth slows due to Bank of England rate hikes. It’s my belief that homes demand will keep on outstripping supply by some distance. And in this landscape Berkeley is likely to remain a big payer of dividends.
For this financial year (to March 2023), Berkeley carries a large 6% dividend yield. And for next year the reading moves to 6.2%.
A safer stock for tougher times
SSE (LSE: SSE) is another cheap Footsie stock on my radar for these uncertain times. I think its ultra-low price-to-earnings growth (PEG) ratio of 0.7 represents excellent value.
Buying stocks that generate all or most of their profits from the UK is dangerous as recessionary risks increase. But electricity producers like SSE don’t face the considerable pressures of cyclical shares due to the essential nature of their operations.
This gives SSE the financial strength and the confidence to pay big dividends, regardless of the economic landscape.
I also like SSE because of its vow to link dividend growth to the rate of retail price inflation (RPI) this fiscal year. Prices are rising at their fastest for decades and investors need to protect themselves from this threat.
Renewable energy giant
SSE isn’t just a great buy for today though. Because of its focus on renewable energy, it’s likely to flourish as the world transitions from fossil fuels to green sources.
The International Energy Agency says that some 295GW of new renewable energy capacity was added in 2021. It predicts that the annual figure will rise to 320GW in 2022.
SSE’s dividend yield sits at a chunky 4.8% for this financial year (to March 2023). And it sits at a healthy 3.4% for fiscal 2024 too, despite plans to rebase the dividend.
Like Berkeley Group, this is a FTSE 100 dividend stock I’d buy today and look to hold for the next decade.