Some of the best dividend shares to buy on the market today are property developers. In my opinion, these stocks benefit from several attractive qualities, which are not present at other firms.
As well as their attractive individual qualities, property developers are currently reaping the rewards from the booming UK housing market. Property prices have been steadily increasing year after year since the financial crisis.
Last year, the trend accelerated thanks in part to the stamp duty holiday and the race for space. Property prices in some regions of the country jumped by a double-digit percentage last year.
Property developers have been capitalising on this boom, but it is a bit of a double-edged sword. While home builders have been able to increase the selling prices of their completed properties, they also have to pay more for land, labour and materials.
However, they can mitigate these headwinds to some extent due to economies of scale. These companies also have vast cash resources, which may give them an edge over other buyers.
These companies are also attractive dividend shares, thanks to their cash generative business models.
Champion of dividend shares
In my opinion, Persimmon (LSE: PSN) is one of the market’s top income stocks. After the financial crisis, the company’s management laid out a plan to return a significant amount of cash to investors over the following few years, to thank shareholders for sticking with the business through the crisis. The corporation has continually outperformed its cash return target, as profits have expanded.
According to its current plan, the firm will pay a dividend of 125p per share in July 2022. Any surplus capital relating to the financial year ended December will be returned in March and April next year. City analysts believe the company will pay a total of 235p per share for the 2021 financial year and 242p for 2022. Based on these projections, the shares offer a yield of around 9%.
With more than £1.3bn of cash on its balance sheet, the group has more than enough headroom to hit these payout targets and to continue to reinvest in new developments. This is why I would buy the stock for my income portfolio.
High-end property
City analysts have pencilled in a dividend yield of around 5% on Berkeley Group (LSE: BKG) shares for the next two years. This company concentrates on building homes for the higher end of the property market.
The average selling price of its properties for the financial year ended April was £770,000, more than double that of Persimmon.
I would buy Berkeley alongside Persimmon to build exposure to the elevated end of the property market. It also has a substantial pipeline of new developments underway with some 63,000 new homes spread across 29 sites. Of these, 23 sites are in production. It also has more than £1bn of cash on the balance sheet, and management is continually seeking out new development opportunities.
Overall, the company is looking to boost output by 50% over the next few years. I think it is likely dividend growth will be a side effect of increased earnings.
Sales pipeline
Vistry Group (LSE: VTY) has already sold all of its properties for 2021. Its total forward sales pipeline was £3bn at the beginning of November.
And the company is not slowing down. Between the beginning of July and the beginning of November, the group acquired land to build a further 2,230 properties across 11 developments. So far this year, 6,337 plots have been secured.
According to management, these land acquisitions will meet building requirements for the 2022 financial year and 80% of 2023. To help support this expansion, the firm held £225m of cash at the beginning of November.
With a dividend of 62p per share pencilled in for the 2021 financial year, rising to 73p for 2022, estimates suggest the stock could yield 6.5% next year. As the company continues to invest in growth, I think it is likely the payout will continue to expand. That is what I would buy the stock.
Growing landbank
Bellway (LSE: BWY) reported a 35% increase in housing completions for its financial year ended July. Overall, profit before taxation increased 72%, and the group’s cash balance jumped from just £1.4m to £330m.
Rising profits and a strong balance sheet give the group plenty of flexibility to invest in growth. It acquired a record 19,899 building plots in the financial period, taking the total number at year-end to nearly 90,000. To capitalise on this growing land bank, management wants to ramp up construction by 20% over the next few years for an annual output of 12,200 homes.
The company reckons this will generate an underlying profit before tax of around £1.25bn, of which half will be returned to investors. The stock yields 4% at present. That is why I would buy the stock.
Rising output
Finally, I would buy Barratt Developments (LSE: BDEV). With a dividend yield of 6.4%, rising to an estimated 7% next year, the company looks to me to be one of the market’s most attractive dividend shares.
The group is targeting output growth over the next few years, with management expecting to approve between 18,000 and 20,000 construction plots in the 2022 financial year. By comparison, the company had just over 15,000 homes pre-sold at the beginning of October. Therefore, it looks as if the firm is planning a significant increase in output over the next few years.
It has the financial capacity to do so with more than £1bn with cash on the balance sheet to fund further land acquisitions and the dividend.
Dividend shares: possible risks
All of the companies above look attractive as dividend shares, but I would be irresponsible to gloss over the risks of investing in these businesses.
House building is a cyclical industry. Just because home prices are rising today does not mean they will continue to do so. If property prices suddenly fall, these companies will be left with expensive development plots on their balance sheets. It may then be difficult for them to earn a return on these assets.
What’s more, many of these businesses are facing high costs for remedying legacy issues with previously constructed properties. For example, Bellway had to spend around 10% of its pre-tax profit in the financial year ended July and nearly 20% in the previous year, fixing safety issues on previously constructed properties. These costs could be a drag on earnings for years.
Still, despite these risks, I would buy all of these companies as dividend shares for my portfolio today.
This post was originally published on Motley Fool
