With the UK property market viewed as overvalued by some commentators, it is perhaps of little surprise that shares in housebuilder Berkeley (LSE: BKG) have fallen of late. In fact, they are down by 20% since the turn of the year and, with the company focused on the prime segment of house building, there are concerns that the macroeconomic outlook of the UK may send prices downwards.
If this were to happen, it would clearly be bad news for Berkeley. Demand for properties could dry up and it could hurt the company’s bottom line. However, this may not lead to a fall in Berkeley’s dividends, since they seem to be extremely well-covered at the present time.
For example, Berkeley expects to pay out £2 per share in dividends every year for the next five years, as part of its capital return programme. While that is generous and equates to an annual yield of around 6.8%, dividends are expected to be covered around twice by profits in each of the next two years. This means that even if profitability comes under pressure due to a fall in house prices, Berkeley should still be able to easily afford to deliver on its dividend guidance.
Very bright prospects
Similarly, British Land (LSE: BLND) also appears to be a sound long term income stock. Like Berkeley, it is subject to the ups and downs of investor sentiment towards the UK property market, but unlike Berkeley it is perhaps more focused on the retail outlook, since its customers are essentially retailers.
Although the near-term outlook for retailers may be somewhat uncertain, the reality is that interest rates are likely to remain low over the coming years. This should help to keep consumer confidence relatively buoyant and allow British Land’s occupants to generate sales growth and most importantly, pay rent and rent increases.
With British Land’s dividend currently being covered 1.2 times by profit, it seems to have sufficient headroom to make shareholder payouts at the current level even if profitability disappoints. And with its earnings set to rise by 8% this year, the dividend prospects for British Land appear to be very bright.
A dominant business
Also offering excellent dividend growth potential is Aviva (LSE: AV). Although some investors are uncertain about the combination with sector peer Friends Life, the merger seems to be moving along as planned, with synergies recorded as Aviva had previously anticipated. With the two companies joining forces it creates a dominant life insurance business which could post stunning earnings growth as well as rapid increases in shareholder payouts.
With Aviva currently yielding 5.4%, it has clear income appeal. However, when its payout ratio of just 51% is taken into account alongside its growth potential, the prospect of a rapidly rising dividend makes Aviva one of the most appealing income plays in the FTSE 100. Furthermore, a price to earnings (P/E) ratio of 9.4 indicates that there is upward rerating potential on offer, too.
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Peter Stephens owns shares of Aviva, Berkeley Group Holdings, and British Land Co. The Motley Fool UK has recommended Berkeley Group Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.