I’m on the hunt for another income stock to add to my portfolio and right now there are some incredible dividends out there. This FTSE 100 housebuilder yields 9.05% a year, but inevitably comes with one or two risks.
Barratt Developments (LSE: BDEV) is the UK’s biggest housebuilder, delivering 17,243 new homes in the last financial year. This is a tough sector to operate in today, as rising interest rates drive up mortgage costs and the cost-of-living crisis makes buyers feel poorer.
This is a stand-out income stock
Mortgage lending is expected to fall 15% in 2023, with property transactions down a staggering 21%, according to UK Finance. House prices are set to fall 9% over the next two years, the Office for Budget Responsibility reckons. It could be more.
The impact on the Barratt share price has been brutal. It is down 45% over the past 12 months. Over five years, the stock is down 33%. It was still struggling to grow even while house prices were booming. So why would I buy it now?
First, it’s a top income stock and that 9% yield is covered 2.2 times by earnings. If I bought it today, I would have to accept the risk that the dividend may be cut. However, management could slice it by a third and it would still give me a pretty decent 6% yield.
Management takes the dividend seriously. While it suspended it in 2020 during the pandemic, it has increased steadily over the last five years, from 26.5p to 39.6p in the year to 30 June.
We live in a different world today, of course. In October, Barrett said the current crisis has hit new home sales, with average net weekly private reservations falling from 281 to 188. It also lowered full-year pre-tax profit guidance slightly to £972.5m.
I’d buy Barratt for its blockbuster yield
The mortgage market went haywire in the wake of former chancellor Kwasi Kwarteng’s mini-budget, but has settled somewhat. Two-year fixed rates have retreated to as low as 4.65%, while five-year fixes are also below 5%. Before Jeremy Hunt took charge, they peaked at almost 7%. Yet there is no doubt that 2023 will be tough for the housing market, and Barratt too.
The good news is that demand for property is still high, given the UK’s housing shortages. Barratt still claims a “strong forward order book” and expects completions in line with 2022. Against this, we have to balance a dip in net land approvals, which have fallen below replacement level. Yet this will help preserve cash.
Barratt had net cash reserves of £1.14bn at the end of June, which bodes well for the dividend. The share price could have further to fall, but today’s dirt-cheap valuation of just 4.9 times earnings reflects many of the challenges it faces.
It’s now on my watchlist and I’ll buy it when I have the cash, with the plan to hold it for the long term. That way I get to buy Barratt when it’s cheap, and should benefit when the recovery finally comes.
