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5%-plus dividend yields! Could this cheap income hero make you an ISA fortune?

Income chasers looking for big dividends well into the next decade could do a lot worse than to check out construction colossus Redrow (LSE: RDW) today.

It’s understandable that concerns over Brexit continue to hamper demand for the UK’s listed housebuilders. Such concerns have resulted in the FTSE 250 firm’s rock-bottom forward price-to-earnings ratio of just 6.5 times. In economically-uncertain times like these home values sink and, accordingly, City analysts expect earnings growth at Redrow to fall for the fourth year on the spin in the current fiscal period (ending June 2020) and to just 1%.

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The builder might not be a pick for growth-minded investors, then, though there’s still plenty for dividend hunters to celebrate. With earnings expected to keep trekking northwards, annual payouts are expected to follow suit – albeit also at a slower pace than usual – and for this financial year a 31.5p per share total reward is forecasted.

5% dividend yields

This results in a 5.2% prospective dividend yield, one which blasts the 3.3% forward average to smithereens. And what’s more, Redrow looks in pretty good shape to meet this payout estimate, which is a lot more that can be said for many other FTSE 250 dividend estimates thanks to the slowing UK (and global) economy.

Not only is the predicted dividend covered 3 times by anticipated earnings – well above the widely-accepted safety benchmark of 2 times – but the company generates the sort of cash flow to keep paying big dividends. Redrow might have £32m of net debt on the books today versus net cash of £132m a year ago, but this was chiefly down to the business returning £218m of cash to its shareholders during the past 12 months.

Top trading

As I say, Brexit might have derailed the stratospheric home price growth of recent decades and with it the whopping profits growth of Redrow and its peers. But thanks to the country’s colossal homes shortage, demand for newbuild properties from first-time buyers keeps shooting through the roof, and is likely to do so well into the 2020s as low interest rates would appear here to stay.

Indeed, Redrow’s trading performance since the start of the new financial year illustrates this point perfectly. During the 18 weeks to 1 November, the value of net private reservations (excluding exceptional items) edged 2% higher to £598m, the business announced on Wednesday, while the weekly rate on a like-for-like basis was better at 0.67 versus 0.64 last time around. Average selling prices meanwhile were up £1,000 at £389,000 per unit.

What’s more, this latest release showed that business will remain robust for some time yet. Completion timings in London and hampered outlet growth in the first half means that some revenues and profits have been pushed back to the final six-month period, sure, but a record order book of £1.3bn – up 8% year on year – perfectly illustrates the strength of the market.

Given the size of that yield and that rock-bottom valuation, I reckon Redrow is a brilliant ISA pick with plenty of upside, both in the near term and beyond.

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