These popular dividend stocks offer yields far above the 3.8% average for FTSE 100 shares. Which should I buy for my portfolio in October?
Home sales struggle
I’ve held shares in housebuilder Taylor Wimpey (LSE:TW) for years. And given the long-term outlook for UK property prices I intend to cling onto them, despite current difficulties in the domestic homes market.
Britain’s rapidly growing population should drive demand for new build properties skywards over the next decade. However, current market troubles mean I don’t plan to add to my existing Taylor Wimpey holdings. It’s my view that dividend forecasts for the next 12-24 months could fall far short of forecast.
The latest data from Rightmove illustrates how sharply homebuyer demand continues to sink. It showed that more than a third (36.1%) of listed residential properties have had to cut asking prices. This is the highest level since early 2011.
Unfortunately, there is a high chance that things will get worse, too. Some believe that interest rates may have peaked. But the Bank of England’s borrowing benchmark is likely to remain at higher-than-normal levels as inflationary pressures only slowly improve.
Signs of growing strain for the UK economy are another cause of worry for the housebuilders. A recent spike in unemployment to 22-month highs of 4.3% is a particular concern.
Dividends in danger?
Unlike Vistry Group, Taylor Wimpey doesn’t have significant exposure to the affordable homes segment where trading has been more stable. Consequently, revenues and operating profit dropped 21.2% and 44.5%, respectively, during the six months to June. Its order book also slumped to 7,866 homes from 10,102 homes previously.
On the plus side, Taylor Wimpey has plenty of cash on the balance sheet that could help it meet current dividend forecasts. Net cash remained at £654.9m as of June.
Yet given the pace at which the homes market is worsening, I wouldn’t be shocked to see 2023’s dividend disappoint as the rush to conserve cash intensifies. The fact that predicted earnings per share is lower than expected dividends is another enormous red flag.
A better dividend stock
The rentals market continues to strengthen as the supply/demand balance worsens. Those aforementioned affordability issues for new buyers, allied with a steady exodus of buy-to-let investors, is driving profits at residential landlords higher.
PRS REIT owns more than 5,000 rental homes in its portfolio. And in the three months to June, average annual rental growth rose to 7.5% from 5.7% during the prior quarter.
Critically for future dividends, the revenue the company generates is highly reliable too. It collected 99% of rents between April and June, which reflects the stable nature of its residential property.
Today, PRS carries a large 5.8% dividend yield. I think it’s a top buy despite the lingering threat of high build cost inflation.
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