Over the past year, the UK property sector has been performing very well. The underlying driver behind this is rising property prices. After posting gains for much of this year, prices continued to rise in October by 1.8%. This was the largest monthly rise for October since 2015. As an investor, I think it makes sense to buy stocks in areas with momentum. When looking for top income stocks, I can also find value.
Companies I’m looking at
The property company with the highest dividend yield in the FTSE 100 right now is Persimmon (LSE:PER). The homebuilder currently offers investors a generous 8.72% yield.
A recent trading update showed that growth was seen in Q3 and overall year-to-date. Legal completions are expected to finish up 10% versus 2020. In terms of forward sales, this figure is expected at £1.15bn, higher than even pre-Covid levels in 2019 of £0.95bn.
Over a one-year period, the share price is down almost 4%, something that has helped to boost the dividend yield. Yet it’s not such a large fall as to put me off from buying this top income stock.
In the same vein, I also like the look of Taylor Wimpey (LSE:TW). The share price might still be up 6% over a one-year period, but it’s down over 8% in the past three months. This has helped to push the dividend yield up to 5.42%.
One reason why I like the business as a top income stock for the property sector is the profit margins. The company is on track to meet 2021 outlook guidance, which would put the operating profit margin between 21% and 22%.
This comfortable margin should help to ensure profitability going forward. Even if unexpected costs occur, it’s large enough to provide a buffer to limit the impact. If profitability remains steady, dividends should also continue to be paid.
Risks with these top income stocks
Both the sector and the specific firms do have risks that I need to be aware of. Firstly, the impact of higher interest rates. Both companies ultimately need mortgages approvals to be high and for clients to be able to pay for the finished homes. Yet I expect the Bank of England to raise interest rates next month, and again next spring. This will make mortgages more expensive, and could cause people to rethink buying a property.
Another risk is the property prices. With the stamp duty holiday and other Covid-related assistance measures being wound up, it’s going to be more expensive for many to buy a home. If the broader market sees a slowdown, property prices will fall. This will impact Persimmon and Taylor Wimpey as the average selling price will fall. This will negatively impact revenue, even with a solid forward order book.
Even with those risks, I still feel the above average dividend yields make it attractive to buy these top income stocks. If I’m still concerned then I can always include other dividend stocks from different sectors to reduce the exposure to this area.
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Jon Smith and 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.
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