Inflation is rising rapidly and affecting nearly every industry throughout Europe as supply chain issues and raw material prices start to hit companies’ costs. Consumer Price Index data for the UK (the standardised measure of consumer goods prices) rose to 7% annually for March. The cost of living has risen significantly whilst equity prices have fallen. The FTSE 100 is down by 0.19% year-to-date. Consequently, the vast majority of UK pensions and ISAs have lost value in real terms (accounting for inflation). When times are tough, traditional companies with robust business models tend to fair better than their growth counterparts. Therefore, in order to outperform inflation and a depressed market, I’m looking to consistent dividend stocks giving some cash back to shareholders.
A stable foundation
Despite how tight living costs get, people will always need shelter — it is a survival necessity. As a result of this, the property construction market tends to be relatively resilient is times of economic distress. However, I highly doubt everybody will be looking to splash on expensive new homes and lavish DIY projects in this moment of uncertainty. That is where Persimmon’s (LSE: PSN) market positioning may become a significant competitive advantage.
Persimmon is a property developer that primarily focuses on supplying housing at the lower end of the price spectrum. Demand within this segment of the construction market is extremely robust due to its priority over upper-end properties. In addition to this, with incomes falling, the addressable consumer market for Persimmon might actually rise as previously middle-income tenants look for cheaper homes.
Persimmon’s forecast dividend yield is currently 11.2%, with a 5.2% payment of 110p per share expected in June. Furthermore, as noted in its trading update released on 27 April, revenue is expected to grow by a comfortable 4-7% with no substantial impacts suffered from the crisis in Ukraine.
Consistency, consistency, and more consistency
When economic situations are very volatile and uncertain, reliability and stability are priceless. Taylor Wimpey (LSE: TW) has paid its dividend consistently for the past 11 years. Some of those years even included a special payment due to strong performance. Currently, its forecasted yield is sat at an impressive 7.8%.
Generally speaking, the business model that Taylor Wimpey utilises is very similar to that of Persimmon, disregarding a smaller set of operations in Spain. They both essentially share the affordable residential property construction market in the UK. The reason that I’m looking to buy in is largely due to the advantage of diversification in a risky market.
Taylor Wimpey has also forecasted strong full-year performance that is on track with targets. As well as its cash generation, the actual share price of Taylor Wimpey looks relatively cheap for the market and sectors it operates in. A forecasted price-to-earnings (P/E) ratio of six compared with a three-year average of 14 appears good value considering the promising trading update.
I’m going to just wait and read one more trading update reassuring my optimism about housebuilders before buying in. But if it turns out to be solid, I’m getting in before the market wakes up to this opportunity.