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A dirt-cheap, 5%-yielding FTSE 250 dividend stock that I’d buy and never sell

The market remains reluctant to embrace big-yielder Bellway (LSE: BWY) as I believe it should.

The house-builder’s share price remains stuck around the 16-month lows struck earlier in October and the rapid share price gains of 2017 are now a thing of the past, Bellway’s market value having contracted by more than 20% since the start of the year.

Stock pickers are silly to disregard the FTSE 250 giant, in my opinion. Its resilience in a tougher-than-usual trading environment is to be commended and should be attracting investment interest, not selling activity. In fact, I’d be happy to buy the business now and hang on to it forever, my bullishness reinforced by recent news flow from the construction colossus.

Profits still exploding

The extreme nervousness created by the ongoing Brexit saga means that homes demand isn’t as strong as it was prior to the summer 2016 referendum. There’s been a consequent slowdown in house price growth and particularly so in London, a region which has, of course, long been accused of being an overinflated market.

However, the slowdown in the homes market as a whole is being caused by existing homebuyers hitting the pause button and electing to stay put and watch political and economic developments before ‘switching up.’ Indeed, sales of new-build properties remain pretty strong thanks to the army of first-time buyers out there, and even though the profitability of the likes of Bellway is moderating as lower property prices hit, the home-builders still have plenty of scope to create decent profits growth.

City brokers believe that Bellway certainly has what it takes to keep grinding out earnings progress, and they are forecasting a 6% bottom-line rise in the 12 months to July 2019. And it’s easy to see why in the wake of fresh financials released earlier this week

The Newcastle-based business declared that revenues pounded 16% higher in the 12 months to July, to £2.96bn, a result that increased pre-tax profit by 14% to £641.1m.

Bellway has increased volumes for 10 years on the bounce and last year burst through the 10,000-homes barrier to deliver 10,307 new units, and it doesn’t plan to put the brakes on build rates just yet. Why would it? Its order book rose to £1.47bn as of the close of last month versus £1.36bn at the same point last year.

It’s a keeper!

The UK homes shortage will of course take some considerable time to remedy, leaving plenty of opportunity for profits at the likes of Bellway to continue thriving. And this means that dividends look set to keep rising as well, with future payments also supported by its strong balance sheet (Bellway’s net cash jumped to £99m as of July from £17m a year earlier).

A 146.5p per share dividend is forecasted for the current fiscal year, up from 143p in fiscal 2018 and resulting in a bumper 5.2% yield. This projection also looks pretty secure owing to dividend coverage of around 3 times.

Right now Bellway carries a forward P/E ratio of just 6.3 times. I’ve mentioned it before but I believe the business is deserving of serious attention at current prices. I myself own shares in a couple of the country’s home-builders and I’m happy to do so for an age. I’d be content to buy Bellway and hold it forever too.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.