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FTSE 100 housebuilders: Why I don’t buy them for dividends

Dividends can be found in many sectors of the FTSE 100 index. However, one sector I’ve never been overly bullish on, from a dividend investing point of view, is the housebuilders. While yields have been sky high (10%+) at times, I’ve always thought that investing in housebuilders for income was a risky move.

Today, my decision to avoid the FTSE 100 housebuilders when putting together a portfolio of dividend stocks looks justified. Here’s why.

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FTSE 100 housebuilders: risky dividend stocks

On the few occasions that I’ve covered FTSE 100 housebuilding stocks here at The Motley Fool, I’ve always pointed out that housebuilding is a highly cyclical industry. During the Global Financial Crisis, dividends from the sector completely dried up.

For example, when I covered Berkeley Group Holdings in late 2017 (BKG offered a 5% yield at the time), I said: “Income investors should also keep in mind the cyclical nature of the industry. This has important implications for dividend payouts. Looking at BKG’s dividend history, the company paid shareholders NO dividends between 2005 and 2012.”

Similarly, when I looked at the investment case for Barratt Developments in late 2018 (a nearly 9% yield at the time) I said: “A downturn in the UK’s housing market could have disastrous implications for Barratt’s dividend. Looking at the group’s dividend history, the group paid no dividend at all between 2008 and 2012, after the Global Financial Crisis hit the UK housing market hard.

Coronavirus dividend cuts

Recently, as the UK has ground to a halt due to the coronavirus pandemic, we’ve seen exactly the same pattern from the majority of the FTSE 100 housebuilders.

For example, in the last few weeks, there have been dividend cuts from Barratt Developments, Taylor Wimpey, and Persimmon. Berkeley Group has said it will maintain its payout for now. There have also been dividend cuts from a number of housebuilders outside the FTSE 100, such as Bellway, Crest Nicholson, Cairn Homes, Redrow, and MJ Gleeson.

Why have so many housebuilders suspended their dividends recently? These companies have been forced to shut down their construction sites in the lockdown, which means conserving cash has become the main priority.

As Taylor Wimpey said in an update last week: “We have taken rapid proactive measures to protect the balance sheet in the short term. However, we are likely to face weeks or months of uncertainty, including periods of inactivity which will limit our ability to complete on homes and therefore generate cash.”

Takeaway

Ultimately, the lesson for dividend investors here is that highly cyclical companies such as housebuilders are generally not good long-term dividend stocks. If your goal is to generate a steady flow of dividends, it’s a good idea to focus on companies that are able to generate steady earnings and cash flow no matter what’s happening to the economy. 

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Edward Sheldon has no position in any 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.