I’m hoping to have some extra cash to spend on UK shares to buy next month. So right now I’m building a list of the best dividend stocks to buy. Should I buy these high-yield shares for passive income?
Major housebuilders like Bellway (LSE:BWY) are being crushed by tough conditions in the UK homes market. And at the moment these pressures look set to persist, casting a shadow over the level of dividends investors can expect.
Bellway itself announced this week plans to scale back building rates in response as buyer demand slumps. It expects to build around 7,500 homes in this financial year (to July 2024), down from 10,945 last year.
Last year Bellway’s revenues and underlying pre-tax profit sunk 3.7% and 18.1% respectively, to £3.4bn and £532.6m.
The FTSE 250 builder said that its 7,500-home target “will depend on the trajectory of mortgage interest rates and the strength of demand in the autumn and spring selling seasons”. Given how stubbornly high UK inflation remains, there’s a good chance interest rates and thus mortgage costs will keep rising.
On the plus side, Bellway’s balance sheet has remained robust despite recent pressures. Net cash declined just 5.4% in financial 2024 to stand at £232m as of July. This encouraged the company to keep the full-year dividend frozen at 140p per share.
But Bellway’s financial position could look a lot different if the homes market continues to slowly crumble. Worryingly, property listings business Rightmove says that average home prices have risen just 0.5% this month, the slowest pace of growth for this time of year since 2008.
I’m also concerned because the weak level of dividend cover at the firm. The predicted payout of 133p per share is covered just 1.1 times by anticipated earnings. This is another alarm bell that signals a bigger-than-expected payout cut could be coming.
Today Bellway shares carry an enormous 6% dividend yield. But given the fragility of current payout forecasts I’d rather buy other UK shares for dividend income.
The long-term outlook for homebuilders remains robust as population growth drives property demand. But in the current climate I think buying some classic defensive shares could be a better idea for passive income now.
This is why I’m considering adding Greencoat Renewables (LSE:GRP) to my portfolio. Electricity generators like this have supreme earnings stability thanks to the essential services they provide. This gives them the ammunition to pay big dividends regardless of economic conditions.
I believe this particular company could grow profits (and dividends) strongly over the next decade, too. Though it operates in a highly-regulated sector, I think shareholder returns might boom as demand for clean energy takes off. The business has grown capacity to 1.32GW as of June, up from 1.03GW a year earlier.
Greencoat Renewables is one of my favourite renewable energy stocks, too, because of its diversified footprint. It owns onshore and offshore wind assets across several European countries including Ireland, Spain, and France. This reduces the threat that bad weather in one or two places poses to group profits.
The company’s shares offer large yields of 7% and 7.6% for 2023 and 2024, respectively. I think its a great way to generate dividend income.