Thanks to the 2022 stock market correction, finding stocks with a high dividend yield isn’t as challenging as a year ago. Don’t forget, when share prices drop, yields go up. And that creates countless opportunities for shrewd income investors.
One stock in particular that’s caught my attention this week is Ibstock (LSE:IBST). The business is one of the largest manufacturers of clay bricks in the UK, along with other types of construction materials.
Given the housebuilding market is slowing, this may seem like quite an odd pick. Yet after taking a closer look, its current 5% shareholder payout not only looks sustainable, but could be in for some significant growth over the next decade.
Investigating the 5% dividend yield
With interest rates rising to combat inflation, mortgages have become more expensive quickly. This has started to push residential property prices down, which is particularly bad news for homebuilders, given material costs remain high.
Consequently, construction rates have slowed, and the S&P Global/CIPS UK Construction Purchasing Managers’ Index fell to 48.8 in December 2022. As a reminder, any value below 50 means the homebuilding market is contracting.
So, imagine my surprise when I see Ibstock, a critical supplier to the UK residential construction sector, announce trading performance is significantly ahead of expectations.
The brickmaker has proven to be almost entirely resilient to the market slowdown for one simple reason. The UK is in the middle of a clay brick shortage. Even with the recent downturn, there remains plenty of demand with a minimal supply.
Looking at its latest interim results, revenue was up by 28%, operating profit by 25%, and the dividend per share jumped from 2.5p to 3.3p. This all suggests its current 5% dividend yield is sustainable. Moreover, with plenty of excess cash, management has launched a £30m share buyback programme to take advantage of its depressed valuation.
With the long-term demand for housing unlikely to disappear, Ibstock could be a terrific source of passive income for the next decade. At least, that’s what I think.
What are the risks?
Like any investment, there are always risks to consider. And when it comes to identifying winning high-yield dividend stocks, investors need to keep their eyes peeled for threats.
In the case of Ibstock, it’s still prone to market contraction. If demand falls sufficiently, the brick shortage may no longer be a sufficient buffer to protect the group’s cash flow. While this is a short-term problem, its uncertainty could send Ibstock shares down even further.
Another risk factor that caught my attention is the level of internal spending. Management is in the process of making some significant investments in expanding production capacity. And the costs of doing so are starting to add up.
One particular project is its new net-zero carbon brick foundry in Walsall. The original anticipated cost stood at £60m. But management now expects an additional £15m will be required to complete the project by the end of 2023. If costs continue to escalate over the next 12 months, the project may destroy shareholder value and compromise the dividend yield.
Nevertheless, Ibstock appears to be in a robust financial position, with plenty of long-term growth and income potential. That’s why I’m considering this business for my Stocks and Shares ISA once I have more capital available.