Are high-yield FTSE 100 housebuilder stocks too cheap to ignore?

·3-min read
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FTSE 100 housebuilders rank among the highest-yielding dividend stocks in the index.

For example, Persimmon (LSE:PSN), Taylor Wimpey (LSE:TW.), and Barratt Developments (LSE:BDEV) currently boast yields of 4.6%, 7.5%, and 7.4% respectively.

However, with their prospective outlooks under scrutiny amid rising interest rates and reduced customer affordability, are these Footsie housebuilders’ dividend yields sustainable? If so, should I buy some shares? Let’s take a look.

Navigating the challenging economic conditions

When it comes to high dividend yields, there are no guarantees. That’s particularly the case for Persimmon, Taylor Wimpey, and Barratt Developments.

To illustrate, in 2022, Persimmon was forced to slash its dividend by 74% to preserve cash. The group’s new dividend is expected to remain rebased at this level with a view to growing it over time. Even still, I think the prospective yield will still be challenging to meet.

Taylor Wimpy’s 7.5% yield is one of the highest in the FTSE 100. While that immediately sets off alarm bells in my head, I’m put at ease thanks to the group’s dividend policy being linked to asset value rather than earnings.

This means I’m more likely to receive a base level of dividend even in an economic downturn. That said, dividend policies can change in a flash so nothing rules out a reduced payout level.

In February this year, Barratt Developments announced an interim dividend of 10.2p, down from 11.2p last year. Recently though, the group reduced its dividend cover policy, which helps in propping up the prospective yield. That said, it remains the case that dividends are variable and certainly not guaranteed.

Are these dividend shares too cheap to ignore?

Although all three companies face a challenging outlook that could harm dividends in the short run, I think they remain attractive income stocks for the long term.

A combination of factors reassure me. Above all, the long-standing imbalance between housing supply and demand means the long-run prospects for housebuilders remain upbeat.

Given the potential for light at the end of the tunnel, I think Persimmon, Taylor Wimpey, and Barratt Developments shares could be undervalued at present. To illustrate, their price-to-earnings (P/E) ratios are 5.2, 6.7, and 5.8 respectively.

As a result, I reckon each one of these three FTSE 100 housebuilder stocks look like they could be too cheap for me to ignore at current prices.

My final verdict

As I’ve mentioned, dividends across the sector are likely to fall before they rise. With that in mind, I’d make sure I wasn’t relying purely on FTSE housebuilders for my dividend income. Regardless, I’m always in it for the long term.

As such, I’d happily buy some shares in all three companies as part of my strategy to build long-term passive income.

But until I get my hands on some spare cash, I’ll be watching from the sidelines for now.

The post Are high-yield FTSE 100 housebuilder stocks too cheap to ignore? appeared first on The Motley Fool UK.

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