There’s strong demand for new homes, underpinned by the Help to Buy scheme and a competitive mortgage market. Big builders can be bought at earnings multiples as low as 8.6 and with dividend yields as high as 10.4%. Investing in our trio seems like a no-brainer.

However, I’m far from convinced it’s wise. Indeed, after a decade of unprecedented economic stimulus, I see think that 2020 could be disastrous for these stocks.

Labour pains

The Labour Party hates companies making ‘unreasonable’ profits, especially from supplying the basic human needs of water, food, warmth and shelter. In recent years, big housebuilders have been the standout flaunters of the kind of supranormal profits, extravagant boardroom bonuses and lavish dividends that Labour despises.

Furthermore, it blames the big builders for a dysfunctional UK housing market. I would expect its policies to put Barratt, Persimmon and Taylor Wimpey on a punitive diet of thin profit-and-dividend gruel — at best. And I’d expect their shares to crash in the event of a Labour general election victory.

Steroids

Housebuilders’ profits have skyrocketed since the introduction of Help to Buy in 2013. The scheme is set to end in 2023, but from 2021 will only be available to first-time buyers and with regional caps on the price tags builders can put on Help to Buy homes.

Help to Buy has faced criticism from across the political spectrum, and while a U-turn on policy seems unlikely, I think an early end to the scheme would smash Barratt, Persimmon and Taylor Wimpey’s share prices. Even as things are, in 2020, I’d anticipate their shares coming under pressure, as the market looks increasingly to the profit-sapping prospect of the reduced dose of Help to Buy steroids in 2021.

Overdue

A ‘desire’ for home ownership shouldn’t be equated with ‘demand’ in the economic model of supply and demand. This can be easily illustrated. If banks were to stop underwriting new mortgages tomorrow, the desire for home ownership wouldn’t change, but demand would fall off a cliff. The only demand for companies like Barratt, Persimmon and Taylor Wimpey would be from a small number of cash buyers.

In an economic downturn, banks inevitably see a rise in bad debts, and become more risk-averse, tightening their lending criteria (including approving fewer mortgages). A disorderly Brexit or damaging continuing period of uncertainty are still not off the agenda, and could yet catalyse a contraction in the UK economy. Furthermore, even if the divorce from Europe goes smoothly, history tells us we’re moving into a period in which a recession is becoming increasingly overdue.

Blink of an eye

Earnings coverage of housebuilders’ dividends is already way below the widely-regarded safety level of 2 — and is as low as 1.1 in the case of Persimmon and Taylor Wimpey.

The trouble with housebuilders, when the economic cycle turns against them, is that falling profits and write-downs of inventories happen so fast, and are of such a magnitude, that strong balance sheets become weak balance sheets — and dividends disappear — in the blink of an eye.

For all of the above risks and reasons, I see Barratt, Persimmon and Taylor Wimpey as stocks to avoid today.

The post 3 reasons why FTSE 100 housebuilders’ shares could crash in 2020 appeared first on The Twelfth Magpie.

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G A Chester 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.

In many cases they offer wide margins of safety, as well as impressive growth potential. As such, they may deliver strong returns in the long run that improve your financial situation and allow you to retire earlier than planned.

With that in mind, here are two large-cap stocks that appear to offer bright long-term futures given their current valuations.

Hiscox

International specialist insurer Hiscox (LSE: HSX) released a trading update on Thursday for the first six months of 2019. The company has reduced its pre-tax profit guidance for the period due in part to a deterioration in the insurance market from catastrophe events in 2018. It now expects to deliver a pre-tax profit of between $150m and $170m for the first half of the year, with the majority of this being made up of investment returns that benefitted from market movements in the second quarter.

As a result of its reduced profit guidance, the company’s shares declined by around 5% following the update. With the company now having a lower level of earnings buffer to absorb the impact of catastrophe events ahead of hurricane season, its near-term prospects could be relatively uncertain.

However, with Hiscox’s retail division continuing to deliver impressive growth, it could offer long-term investment potential. The stock now trades on a price-to-earnings (P/E) ratio of around 17, which suggests that it could offer a margin of safety relative to its historic valuation range. Although the stock could experience a volatile near-term period, it has the potential to beat the FTSE 100 over the coming years.

Barratt

Housebuilder Barratt (LSE: BDEV) may also experience a challenging period over the short run. The housebuilding sector faces an uncertain outlook as a result of the political and economic risks facing the UK. For example, government policy towards the sector may change, and this could lead to a more difficult period for industry incumbents. Furthermore, weak consumer confidence may lead to reduced demand for new homes if the Brexit process encounters additional challenges.

However, investors appear to have factored in the risks facing Barratt. For example, it trades on a P/E ratio of 9.4 at the present time, which suggests that it offers a wide margin of safety. The company is also in a strong financial position, with its balance sheet having improved since the financial crisis. This could allow it to overcome a future downturn for the housing market, and emerge in a strong position relative to sector peers.

Therefore, while risks may be elevated at the present time, the potential returns from investing in Barratt could be highly attractive. As such, for long-term investors who are seeking to get rich and retire early, it could prove to be a worthwhile investment.

The post Looking to get rich and retire early? I’d buy these 2 FTSE 100 shares today appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Barratt Developments. 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.

Certainly, the world economy may be facing an uncertain period. Fears surrounding the US economy and the potential for a widening of tariffs could cause sentiment to come under pressure.

But for long-term investors who are seeking a relatively high yield, these two stocks could offer an impressive outlook.

Barratt Developments

The housebuilding sector continues to deliver impressive returns, with Barratt (LSE: BDEV) reporting strong demand for new homes. The government’s Help to Buy scheme and stamp duty relief for first-time buyers appear to be providing support to the industry at a time when political and economic uncertainty remains high.

As such, now could be a good time to buy shares in housebuilders. Interest rates are expected to remain at low levels over the medium term, which could make houses increasingly affordable. And, with investors seemingly having priced in the potential risks facing the sector, there may be wide margins of safety on offer.

Barratt, for example, currently trades on a price-to-earnings (P/E) ratio of around 8.2. This suggests that investors are expecting a period of weak performance. However, the company is due to post a rise in net profit of 3% in the current year. This suggests that its strategy is working well, and that it could generate further profit growth over the medium term.

With a dividend yield of around 8%, the stock appears to offer significant income investing potential. As such, now could be a good time to buy a slice of it for the long term.

Severn Trent

Severn Trent’s (LSE: SVT) dividend yield of 5% holds appeal even though the wider utility sector faces an uncertain period. Although the company’s recent results have shown that it is making progress from an operational and financial standpoint, investor sentiment may remain changeable due to the political and regulatory risks faced by the wider industry.

This, though, could present long-term investors with a buying opportunity. With the stock trading on a P/E ratio of around 14.8, it appears to be relatively cheap when compared to its historic ratings.

Furthermore, Severn Trent’s business model may be less dependent on the performance of the world economy than some of its FTSE 100 peers. Therefore, should the threat of a global trade war cause world GDP to experience a period of slower growth, stocks with defensive characteristics may become increasingly popular among investors.

This could mean that, as well as a high income return, there is scope for the company’s shares to outperform the FTSE 100 over the medium term.

The post Looking to invest in FTSE 100 dividend stocks? Here are two 5%+ yielders I’d buy today appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Barratt Developments. 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.

With this in mind, I reckon the market is currently offering canny investors a second chance to sell and bank profits on Footsie builders Barratt Developments (LSE: BDEV), Persimmon (LSE: PSN) and Taylor Wimpey (LSE: TW).

The most popular markers of value — low price-to-earnings (P/E) ratio and high dividend yield — can lead investors in housebuilders astray. As you can see in the table below, attractive P/Es, yields, margins and profits are a siren call luring investors in at the top of the housing cycle. However, a less frequently used valuation metric flashes a big red warning signal: price-to-tangible net asset value (P/TNAV).

I first suggested cashing in profits on housebuilders 18 months ago. In an article on Persimmon, I noted that at its then share price of 2,800p, its P/TNAV was at an unprecedented high.

Its shares, along with those of its peers, fell heavily through 2018. However, they’ve rallied this year on further record profits, and while they’re not back to previous levels, current valuations, in the table below, are screaming ‘sell’ to me.

All three builders have issued recent trading updates. All note a positive backdrop for the industry, summed up by Barratt: “The housing market fundamentals remain attractive, with a long term undersupply of new homes, strong government support … and a positive lending environment,”— Persimmon also highlighting “high levels of employment.”

Help to Buy has been a particular boon for housebuilders (“a special kind of quantitative easing just for them,” as Merryn Somerset Webb wrote in an acerbic article on the subject in the Financial Times), but the industry has just about everything in its favour right now. When things are this good, there’s only one way they can go.

Builders will have to survive on a somewhat reduced supply of the crack-cocaine of Help to Buy from 2021, before going cold turkey in 2023. However, we could see other demand-sapping things, such as rising interest rates or lower mortgage availability, before then.

Meanwhile, on the costs side, build cost inflation of 3%-4%, forecast by the companies at the start of this year, isn’t helpful. And, while Persimmon and Barratt reiterated guidance in recent trading statements, Taylor Wimpey said: “[We] now expect build cost inflation for 2019 to be c. 5%.” It also said — and something of a concern with any company — meeting overall expectations for the year is dependent on results “weighted towards the second half.”

In summary, with all the demand stimuli for housebuilders currently at max, I see all the risk being to the downside. And with their P/TNAVs flashing red, I’d be inclined to sell and book profits on Barratt, Persimmon and Taylor Wimpey.

The post Last chance to take profits on these 3 FTSE 100 dividend stocks? appeared first on The Twelfth Magpie.

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• This 5.5%-yielding income stock’s at a 13-year low and cheap to-boot! Time to consider buying?
• Down 65% but yielding 6%! Is this FTSE 100 dividend stock an unmissable bargain?

G A Chester 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.

Meanwhile, investors in medical devices group Smith & Nephew (LSE: SN), which put out its annual results this morning (also well-received by the market), have had a less tumultuous time. However, it’s the future I’m really interested in, and where these two FTSE 100 stocks could go from here. Do I think they could make or break your wealth in 2019?

Earnings outlook

There’s considerable uncertainty about the earnings outlook for Barratt. The table below shows City analysts’ earnings per share (EPS) forecasts for its current and next financial years, according to Reuters.

As you can see, there’s extreme divergence in the range of projections. For fiscal 2020, the high estimate of 81.8p is 19% above the mean, while the low of 33.1p is 52% below. At the current share price, the price-to-earnings (P/E) ratio ranges from 6.9 (cheap) to 17 (expensive).

Meanwhile, Barratt’s intended dividend returns (ordinary and special) of 44.2p (7.9% yield) for 2019 and 44.7p (8%) for 2020, are partly calculated with reference to the Reuters EPS mean.

Brexit

Bank of England governor Mark Carney warned last September that house prices could crash as much as 35% over three years in the event of a no-deal Brexit. If such a divorce were to trigger a crash, even the lowest EPS forecasts for Barratt, as well as the prospective dividend yields, would go out of the window. The shares would get hammered.

However, in the event of an orderly Brexit, I think the market would likely see the mean or upper-end EPS forecasts as reliable and the dividend as sustainable. The shares could continue to rally, although, as I’ve argued in a recent article, I think there’s a risk of a housing correction or crash — regardless of the Brexit outcome. This wold be due to unprecedented levels of consumer debt, and the world moving towards a phase of quantitative tightening and rising interest rates. Personally, I’m happy to avoid Barratt at this stage.

Stability and visibility

Unlike the notorious boom-and-bust housebuilding industry, healthcare tends to be a more stable sector through the ups and downs of economic cycles. Smith & Nephew today reported underlying revenue growth of 2% for its financial year ended 31 December. Underlying EPS rose 7% and the board increased the dividend by 3%.

Turning again to Reuters and City analysts’ forecasts, we find a marked difference to Barratt in terms of the range of EPS projections:

As you can see, the range is far narrower for Smith & Nephew, the extremes being just 10% above and 6% below the mean. This reflects the superior stability and earnings visibility of this international medical devices business.

At a share price of 1,500p, the P/E is between 17.6 and 20.6, while there’s a prospective dividend yield of 2%. I believe the company merits this premium valuation, and I rate the stock a ‘buy’.

The post Could FTSE 100 housebuilder Barratt make or break your wealth in 2019? appeared first on The Twelfth Magpie.

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• Down 33% with a 5.6% dividend yield, is this FTSE 100 stock a once-in-a-decade buy?
• Why are these FTSE 100 growth and dividend stocks so cheap?
• Down 65% but yielding 6.7% – is this beaten-down UK stock now a generational bargain?

G A Chester 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.

First, I have to acknowledge there are positive things about Barratt. It issued a strong trading update last month. Its current share price of 540p is cheap compared with 700p less than a year ago. And its low earnings rating and high dividend yield appear to indicate tremendous value for investors today, if the shares were to return to that 700p level.

Why so cheap?

Barratt has a 30 June financial year-end and is due to release its annual results on 5 September. Analysts are expecting earnings per share (EPS) of 66.1p and dividends (including a special) of 43.7p. The price-to-earnings (P/E) ratio is 8.2 and the dividend yield is 8.1%. This valuation is either too cheap to ignore or too good to be true.

An argument for too cheap to ignore is that the shares are temporarily depressed due to Brexit worries and that the cheap valuation offers a wide margin of safety should Brexit go less than smoothly. However, I’m more inclined to think that the market is beginning to price-in the next crash in the time-honoured boom-and-bust housing cycle.

When Barratt’s shares reached 700p last year, the price-to-tangible net asset value (P/TNAV) was 2.1, which is the sort of valuation we find at the top of the cycle. At the bottom, we tend to find the stock at a discount (P/TNAV below 1). Despite the decline in the shares, Barratt’s current P/TNAV of 1.5 suggests they could have a lot further to fall, when the next bust comes over the horizon.

Rising interest rates and Barratt’s elevated P/TNAV lead me to view its current cheap P/E and high dividend yield less as too cheap to ignore and more as too good to be true. As such, after a decade of terrific returns, I’d be inclined to sell the shares and bank profits at this stage.

A stock to hold?

If I were looking to hedge my bets and retain some exposure to the housebuilding sector, Henry Boot (LSE: BOOT), which released its half-year results today, is a stock I’d be happy to hold.

The group has a strategic land arm and a housebuilding joint venture, but also has several other businesses: commercial property development, construction (public and private sector), plant hire, and a long-term contract with the Highways Agency to operate and maintain the A69 trunk road between Carlisle and Newcastle.

The shares are trading 3.5% higher at 280p on the back of today’s results but are still well below their 52-week high of near to 350p. The company reported a 20% rise in EPS for the six months ended 30 June and the board lifted the interim dividend by 14%. The trailing 12-months EPS and dividend are 34.7p and 8.4p, respectively. The P/E is 8.1 and the dividend (covered over four times by earnings) gives a yield of 3%.

Boot has reduced its borrowings significantly over the last year. It now has, as management said today, “a prudent level of gearing which, in our view, is vital at this stage of the economic cycle.”

The post Is the Barratt share price set to return to 700p? appeared first on The Twelfth Magpie.

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• Why are these FTSE 100 growth and dividend stocks so cheap?
• Down 65% but yielding 6.7% – is this beaten-down UK stock now a generational bargain?

G A Chester 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.

With that in mind, here are two stocks that appear to offer impressive income outlooks. They could also help you to overcome that threat of inflation.

Challenging period

Reporting on Tuesday was international convenience food company Greencore (LSE: GNC). Its share price dropped 25% after downgrading its outlook for the 2018 financial year. The business has experienced weak performance in its underutilised original sites in the US the first half of the current year. Alongside the timing of new business contributions and unfavourable exchange rates, this means that adjusted earnings per share is expected to be between 14.7p-15.7p, versus previous expectations of 15.7p-16.6p.

Clearly, the company’s profit warning is disappointing. However, its core UK and US operations continue to perform as per expectations. Therefore, it would be unsurprising if there’s a recovery over the medium term. That’s especially the case since the business appears to have a strong position within its key markets.

With Greencore’s dividend yield being around 4%, it offers a real income return right now. Its dividends were covered almost three times by profit last year and this suggests they remain highly sustainable at the present time. Therefore, while considered a more volatile share than many income investors would normally buy, the company could provide a high return in the long run.

Consistent performance

Also offering an inflation-beating outlook is housebuilder Barratt (LSE: BDEV). The company has enjoyed a period of strong growth in recent years and this looks set to continue. Government support for the housing market remains strong via the Help to Buy scheme in particular. This could lead to a continuation of the ‘purple patch’ housebuilders have enjoyed in recent years.

Improving financial performance could allow Barratt to deliver a rising dividend. The company currently has a dividend yield of around 7%, which is covered 1.5 times by profit. This suggests that not only could it offer an income return above and beyond inflation, it may provide dividend growth also ahead of even a fast-rising price level.

With Barratt due to report a rise in its bottom line of 6% this year and 5% next year, the company appears to have a positive outlook. Since it trades on a price-to-earnings (P/E) ratio of around 8.5, it appears to offer good value for the long term. And while the prospects for the UK economy remain uncertain, an imbalance between demand and supply in the housing market could lead to a prosperous future for housebuilders… and shareholders.

The post 2 dividend stocks ideal for beating inflation appeared first on The Twelfth Magpie.

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Peter Stephens owns shares in Barratt. The Motley Fool UK owns shares of and has recommended Greencore. 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.

He built his stake in Barratt during 2017, as part of a broad repositioning of his funds to capture what he sees as “a contrarian opportunity that has emerged in domestic cyclical companies where valuations are too low and future growth expectations far too modest.”

During October, he sold his holding of mid-cap international insurer Lancashire (LSE: LRE) to further increase his stake in Barratt and a number of other UK-focused FTSE 100 stocks. I’m not convinced that selling Lancashire, which announced its annual results today, was a good move. At the same time, I reckon buying Barratt is fraught with danger.

Lots of positives

The UK’s largest housbuilder is set to release its interim results for the six months ended 31 December next Wednesday. They’re going to be good because the company told us in January that it had “delivered a strong performance in the first half.”

In the same update, Barratt pointed to a string of positive features for the business, including good mortgage availability, a supportive Government policy environment, attractive land opportunities and its “healthy forward order book.” And the board reiterated its commitment to pay a £175m special dividend for the year.

At a current share price of 550p (over 20% down from last year’s post-financial-crisis high of above 700p), Barratt trades on just 8.5 times forecast earnings, while the forecast dividend (ordinary plus special) gives a yield of 7.9%. What’s not to like?

Downside risk

I have several concerns. Housebuilders have enjoyed a terrific bull run since the financial crisis, but this a notoriously cyclical boom-and-bust industry. Housing fundamentals may look good currently and the earnings multiple and dividend yield may scream ‘bargain’ but things can change quickly and other metrics — price-to-book and margins — suggest we’re at or near the peak of the cycle.

And with government stimulus measures also at full throttle and rising scepticism about their effectiveness, I believe risk has turned very much to the downside. As such, I’m inclined to rate Barratt a ‘sell’.

Dealing with catastrophe

Insurance is also a cyclical business and as Lancashire’s results today revealed, 2017 was a bad year for catastrophe losses, with hurricanes and wildfires taking a heavy toll. The company posted a $71m loss compared with a $154m profit in 2016.

However, managing such extreme years is all part of the business. While a loss is never welcome, the company was pleased that its risk management model passed this “real-time ‘stress test’.” In fact, Lancashire is a consistently well-managed business and has returned almost all of its profits to investors via dividends since becoming a public company. The annualised total return over the past 10 years is an impressive 16%, compared with 6% for the FTSE 100.

There was no special dividend for 2017, with shareholders having to settle for the modest regular ordinary dividend of $0.15 (10.6p at current exchange rates). The shares are almost 7% down on the day at 610p but the City expects a rebound in earnings and dividends in 2018. The forward P/E is 13, the prospective yield is 6.2% and I rate the stock a ‘buy’.

The post Neil Woodford’s favourite housebuilder isn’t the only 6%+ yielder on offer today appeared first on The Twelfth Magpie.

More reading

• This beaten-down FTSE 100 dividend share just jumped 11% in a week but still yields almost 5%
• £1,000 buys 380 shares in this 5.4% yielding passive income stock
• Down 33% with a 5.6% dividend yield, is this FTSE 100 stock a once-in-a-decade buy?
• Why are these FTSE 100 growth and dividend stocks so cheap?
• Down 65% but yielding 6.7% – is this beaten-down UK stock now a generational bargain?

G A Chester 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.

A stable utility stock

The utility sector is popular among income-seeking investors. It’s not difficult to see why, since business models are generally stable, yields tend to be above average and their defensive characteristics mean they should offer less volatility than most other sectors. Despite this, SSE (LSE: SSE) continues to offer a high yield, which indicates its shares aren’t particularly in demand at the moment.

The stock currently yields 6.3% from a dividend which is covered 1.3 times by profit. And with dividends forecast to rise 2.8% next year, they look set to remain ahead of potentially higher rates of inflation. Although the company’s bottom line is forecast to rise by just 5% this year and 6% next year, a price-to-earnings (P/E) ratio of 12 indicates there’s significant upward re-rating potential on offer.

This could be highly relevant if uncertainty in the wider market builds in the coming months. Investors could become increasingly risk-off and seek out companies such as SSE, thereby pushing its share price higher. Given its high yield and defensive characteristics, it could prove to be one of the FTSE 100’s best performers this year.

A wide margin of safety

Given the potential for uncertainty this year caused by Brexit and President Trump’s policies, obtaining wide margins of safety when buying shares could be more important than ever. Housebuilder Barratt (LSE: BDEV) currently trades on a P/E ratio of only nine, which indicates that it offers significant upward re-rating potential as well as some downside protection. Furthermore, its yield of 7.2% is among the highest in the FTSE 100. Even if its shares rise by only a small amount this year, its total return could easily be in the double-digits.

Of course, the outlook for the UK property sector is uncertain. However, recent updates from across the sector have stated that the industry remains buoyant. And since Barratt’s dividend payments are currently covered 1.5 times by profit, the current level of shareholder payouts appears to be sustainable.

In the next couple of years, dividend growth may be lacking if the UK deteriorates as Brexit becomes a reality. However, Barratt’s sound business model and improving financial strength mean it appears to be well-placed to overcome such challenges. As such, now could be a good time to buy it.

The post 2 FTSE 100 income stocks I’d buy in February appeared first on The Twelfth Magpie.

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• £1,000 buys 380 shares in this 5.4% yielding passive income stock
• Down 33% with a 5.6% dividend yield, is this FTSE 100 stock a once-in-a-decade buy?
• Why are these FTSE 100 growth and dividend stocks so cheap?

Peter Stephens owns shares of SSE. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Redrow said it has seen a rise in net private reservations of 6% versus the same period of last year. Its sales rate for the 19 weeks to 4 November was up 4% year-on-year and the average selling price of properties was also up slightly on last year at £341,000 versus £334,000. This shows that while house price growth has slowed somewhat, the UK housing market has remained buoyant, despite uncertainty surrounding Brexit.

Looking ahead, Redrow remains confident in its future outlook. However, 2017 could prove to be a tough year for the wider industry as uncertainty surrounding Brexit may increase and cause demand for new homes to rise at a slower pace than it has done in recent years. Although this could slow down Redrow’s pace of earnings growth, the business remains in good shape and was able to keep net debt to £92m. This shows that the firm’s balance sheet is relatively robust.

Income potential

However, the real potential for investors when it comes to Redrow is around its income prospects. The company may yield only 3%, but it pays out just 22% of profit as a dividend. This provides scope for a much higher dividend that would still be highly affordable even if profitability fails to rise at a rapid rate.

For example, if Redrow paid out two-thirds of profit as a dividend each year, it would equate to a dividend yield of around 9.6%. Not only could this boost investor demand for the company’s shares, it would also leave the business with sufficient capital to invest in future growth.

Of course, Redrow isn’t the only housebuilder with excellent income prospects. For example, Barratt (LSE: BDEV) currently yields 7.1%. Unlike Redrow, Barratt pays out 67% of its profit as a dividend, which doesn’t negatively impact its financial strength or ability to reinvest for future growth. However, it means that Barratt is more reliant on profit growth in order to boost its dividend, while Redrow could raise dividends at a much faster pace than earnings growth over the medium term.

Furthermore, it currently trades on a lower price-to-earnings (P/E) ratio than Barratt. It has a P/E ratio of 7.3 versus 9.1 for its industry peer. As such, Redrow has greater upward rerating potential, which when combined with its dividend growth potential means that it may prove more popular than Barratt for long-term investors. As such, and while both stocks offer excellent total return prospects, Redrow is the better buy at the present time.

The post This stock could yield as much as 10% appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Redrow. The Motley Fool UK has recommended Redrow. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.