Could this be one of the FTSE 100’s best cheap dividend shares?

Looking for the best dividend growth shares to buy? Our writer Royston Wild thinks this FTSE 100 housebuilder might well be too cheap to ignore.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The recent slowdown in homes demand has battered many housebuilders’ reputations as reliable dividend shares.

Take Barratt Developments (LSE:BDEV), for instance. The FTSE 100 builder has sliced the interim dividend for this fiscal year (to June 2024), to 4.4p per share from 10.2p previously.

As a Barratt shareholder, I can understand the company’s safety-first approach, even if it affects the passive income I receive in the near term. Revenues slumped more than a third in its first half, and net cash sank as completions plummeted.

But City analysts are expecting earnings to rebound sharply from the upcoming financial year. And as a result, dividends are tipped to leap too. Could now be the time to buy Barratt shares for a second income?

Dividend growth

Financial yearPredicted dividendAnnual changeDividend yield
 2024 14.9p – 56% 3%
 2025 18.9p + 27% 3.9%
 2026 23.3p + 23% 4.8%

As the table above shows, dividends are expected to fall by more than half in the soon-to-be-finished financial year.

However, the Square Mile’s abacus bashers think annual rewards will rise by around a quarter year on year in the next two financial years. This means the dividend yield on Barratt shares once again beats the FTSE 100’s forward yield of 3.5% by a decent distance.

It’s perhaps no surprise that brokers are so optimistic. Homes demand is stabilising as lending conditions become kinder to buyers. Barratt has said in February that “we have seen early signs of improvement in both reservation rates and buyer sentiment, helped by expectations of lower interest rates and the introduction of more competitive mortgage rates.”

Cheap as chips

Of course there’s no guarantee that Barratt will maintain this rebound. The economic outlook remains gloomy and rising unemployment creates some danger.

But with inflation falling, analysts expect the Bank of England to enact several interest cuts over the next year to resuscitate the homes market.

This is why City analysts expect earnings to spring back sharply at Barratt. The Footsie company is tipped to record profits growth of 22% and 23% for financial 2024 and 2025, respectively.

Pleasingly, these forecasts mean that the builder also looks cheap from an earnings perspective. Right now it trades on a forward price-to-earnings growth (PEG) ratio of 0.7 for this year.

Any reading below 1 indicates that a share is undervalued. Combined with those big dividend yields, Barratt shares look like good value to me right now.

The verdict

I think a case can be made that Barratt is one of the Footsie’s best-value dividend shares today and it’s worth long-term investors considering it.

Demand for new-build homes is tipped to balloon over the next decade as the UK population grows. The landscape could be even more favourable for the housebuilders too if Labour wins next month’s general election.

The opposition party has vowed to build 1.5m new homes over the next five years, driven by an overhaul of planning rules. Barratt’s £2.5bn mega-merger with rival Redrow would give it even more firepower to exploit this favourable environment too.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has positions in Barratt Developments Plc. The Motley Fool UK has recommended Redrow Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

This UK share has hiked dividends for 32 years – now its price has crashed 30%

Harvey Jones is tempted by a FTSE 100 stock with a stellar track record of dividend hikes. But he wonders…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Should I rush to buy CrowdStrike shares after a 23% fall?

Edward Sheldon has been looking for cybersecurity shares to buy for his portfolio. Should he pile into CrowdStrike after its…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

After crashing 50% and 41%, are these FTSE growth stocks now unmissable bargains?

Paul Summers looks at two FTSE growth stocks currently hated by the market. Might this be a wonderful contrarian opportunity?

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Is this 7%-yielding FTSE 100 dividend star still a bargain after a 34% price rise?

Despite its recent price rise, this FTSE 100 high-yield heavyweight still looks very undervalued to me, supported by strong earnings…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Should I invest today or wait for a stock market crash?

Does it make sense to keep buying shares or save cash for a stock market crash? Our writer thinks there's…

Read more »

Investing Articles

Is this the beginning of the end for the rising Nvidia share price?

Jon Smith explains why the Nvidia share price dropped sharply last week and talks through the key events coming up…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£11,000 of Legal & General shares could make me £14,583 a year in passive income!

A high passive income can be generated from a much smaller investment in Legal & General shares if the dividends…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

2 of the widest moats in the FTSE 100

A durable competitive advantage is key to a good investment. And Stephen Wright thinks a couple of FTSE 100 firms…

Read more »