I’ve spent the last few months adding one income stock after another to my portfolio. The FTSE 100 has been packed with blue-chips combining dirt cheap valuations with ultra-high yields, and I’ve been keen to take advantage.
I can’t afford to invest in everything that takes my fancy and after buying Taylor Wimpey I didn’t think it was wise to double down on the housebuilding sector by purchasing Barratt Developments (LSE: BDEV) too.
Two cheap high-yielders
While that makes sense from a diversification point of view, my decision has hurt because shares in the UK’s largest housebuilder are up 37.2% over the last year. Most of the growth came in the last three months when they jumped 29.97%.
I prefer to buy shares before they recover rather than afterwards, so I feel like I’ve missed out. Luckily, I have two consolations. The first is that Taylor Wimpey has done pretty well, also rising 38.9% over one year and 25.8% over the last month.
My second consolation is that Barratt shares still look cheap to me, trading at 8.4 times earnings (they were even cheaper at 6.5 times, but there you go).
This reflects a brighter housing market outlook, amid growing hopes that inflation and interest rates have peaked. Analysts are now falling over themselves to bring forward their prediction for the next interest rate cut. Some claim it will arrive as early as March. The pessimists reckon we’ll have to wait until August. There’s a chance we could see four cuts in 2024, slashing base rate from 5.25% to 4.25%.
Mortgage lenders are ahead of the curve and borrowing costs are already falling. With luck, this will underpin prices, limit mortgage arrears and repossessions, and forestall a house price crash.
Barratt CEO David Thomas said in October that the trading environment “remains difficult”, as private reservations and forward sales fall. House prices are still falling, with today’s Nationwide figures showing a drop of 1.8% in 2023. This decline may continue, while the UK could slip into recession.
The demise of the Help to Buy scheme hasn’t helped. It has previously accounted for 12% of Barratt’s private preservations. The good news is that Barratt’s balance sheet remains “strong”, to adopt its own description.
It’s the dividend that worries me. In 2022, the stock yielded 8.1%. Today, the headline yield is 6%. That still looks tempting but there could be trouble ahead.
In September, the board trimmed the dividend per share from 25.7p to 23.5p, a drop of 8.6%. I can live with that but markets fear further trouble. Consensus reports suggest Barratt will yield just 2.67% in 2024, and 3.71% in 2025. Markets are more optimistic about Taylor Wimpey, forecasting a 6.36% yield in 2024. I may have bought the right housebuilder after all.
Barratt is still cheap but with the dividend under pressure I’ll look elsewhere for my next FTSE 100 income stock.
