Popular dividend stocks like Barratt Developments (LSE: BDEV) have seen their share prices plummet this year. And this has driven their dividend yields to delicious levels.
Britain’s housebuilders have slumped in value in 2022 as understandable worries over rising interest rates have grown.
Yet a steady stream of trading updates and industry reports show that the housing market has remained rock solid. That’s even as Bank of England rate setters have raised rates in their last five consecutive meetings.
According to Nationwide, annual house price growth surged to 11% in July. This was up from 10.7% a month earlier and pushed the average property value to a fresh record of £271,209.
Stunning value
Now let’s get back to dividends. As I say, the yield at Barratt has rocketed and now sits at 8.9% for the financial year to June 2023.
And in my opinion the business appears in good shape to meet current dividend forecasts. A predicted 43.1p per share dividend payment is covered 1.8 times by anticipated earnings.
This is a robust reading, albeit below the widely accepted security benchmark of 2 times and above. And Barratt has considerable balance sheet strength to help it meet the City’s dividend expectations. It had more than £1.1bn of net cash as of June.
Risk vs reward
I’m not saying that investors shouldn’t take the threat posed by rising interest rates seriously. However, it’s my opinion that the risks of buying housebuilder shares are outweighed by the potential rewards on offer.
I certainly don’t think Barratt Developments deserves such a low valuation. Today its shares carry a forward price-to-earnings (P/E) ratio of 6.1 times. I’d buy.
Mortgage mammoth
One might think that Lloyds Banking Group (LSE: LLOY) could be another top income stock to buy given the resilience of Britain’s housing market.
Mortgages are a big deal to the FTSE 100 bank and home loans represent two-thirds of all of its lending. In the first half of 2022 Lloyds grew the size of its open mortgage book by another £3.3bn, too, taking the total to £296.6bn.
Lloyds is also benefiting from the impact of rising interest rates. Net income here leapt 12% between January and June, to £8.5bn, as the difference between the rates it offered savers and borrowers widened.
A bankable bargain?
On paper Lloyds seems to be a brilliant buy for value investing. A predicted dividend of 2.5p per share for 2022 yields an impressive 5.6%. It trades on a forward P/E ratio of 6.7 times as well.
Pleasingly the income stock boasts rock-solid dividend cover of 2.7 times too.
But I won’t buy Lloyds shares. This is because profits could decline sharply over the short-to-medium term as Britain’s economy sinks. The fact that City analysts have been slashing their earnings forecasts for the bank in recent weeks certainly isn’t a good omen.
Lloyds swallowed a £377m impairment charge for the first half as it readied itself for a wave of bad loans. It’s likely that further drastic action will be required, with the bank also facing a sharp slowdown in revenues. Right now I think it’s far too risky for me to invest in.
