I’m searching for the best low-cost FTSE 100 stocks to buy for passive income next year. Here’s one I think could prove a wise investment in the long term.
A FTSE 100 share I’m watching
Conditions in the housing market are rather bleak heading into the New Year. Rising interest rates are putting homebuyer affordability under extreme pressure. Property demand is also slipping as Britons prepare for a long economic downturn.
I’m not prepared to buy FTSE index housebuilder The Berkeley Group (LSE:BKG) just yet. But I’m on standby to snap it up for my portfolio at short notice.
These construction stocks have sank in value on fears of a housing market crash. Berkeley is down a whopping 21% since the beginning of 2022.
However, recent news suggests the UK homes market may avoid the doomsday scenario that investors and traders have geared up for. If trading at the builders surprises to the upside, share prices could rebound strongly.
London calling
This week Nationwide predicted that “a relatively soft landing may still be achievable in 2023, with activity stabilising modestly below pre-pandemic levels and house prices edging lower.” It thinks average prices might nudge just 5% lower next year.
It’s possible that Berkeley — which focuses on London and the South East — could perform better than its industry peers. This is thanks to its narrow geographic footprint.
Rightmove says that London has been the most searched for location on its property listings platform in 2022. Search levels rose 9% year on year as people steadily flocked back to the capital.
The exodus of homebuyers from London following the Covid-19 outbreak is rapidly reversing. This is perhaps no surprise. The Big Smoke has been one of the world’s most popular cities for centuries. It’s what underpins The Berkeley Group as a top long-term buy, in my opinion.
Sitting tight… for now
Today the builder trades on a price-to-earnings (P/E) ratio of just 9.2 times for financial 2023. It also sports a 5.1% dividend yield.
As I said, I’m not buying yet. The UK housing market could still implode next year, meaning profits (and thus dividends) could fall well short of City forecasts.
The passive income Berkeley provides might also disappoint if build costs keep on rocketing, putting extra pressure on earnings. Its operating margin slumped to 19.5% between May and October. This was down from 22.2% a year earlier.
Yet the long-term outlook for Berkeley and its peers remains solid. Britain needs to build more than 300,000 homes each year to meet growing demand. This is why I already own several other FTSE 100 housebuilders in my portfolio.
But for the time being I’m happy to wait for clearer buy signals before investing in Berkeley. There may be better cheap dividend shares to snap up for income in 2023.
