As some share prices have fallen this year, dividends that already looked tasty have become even more attractive to me. Take housebuilder Bellway (LSE: BWY) as an example. Its share price is down 36% this year. That has pushed the Bellway dividend yield up to 5.9%.
At that level, the passive income potential the firm offers me means I would consider looking at it for my portfolio.
Resilient business performance
Business performance at Bellway has stayed strong even amid mounting worries about the economy.
In a trading update last month, the company said that it has been seeing buoyant sales demand. The cost of building houses has been increased by inflation driving up the cost of building materials and labour. But Bellway has been able to push its selling prices up too. The company continues to be upbeat about the likelihood of robust sales both this year and next.
However, while the business has been performing strongly, I think the tumbling share price reflects some significant risks for Bellway and the housebuilding sector in general. One of these is the possibility of a slowdown in housing demand. Even if selling prices remain stable, higher interest rates and a reduction in the Help-to-Buy scheme could lead to demand from buyers easing off. On top of that, inflation continues to dog the sector. But Bellway reckons supply chain issues have been easing. The firm expects to continue being able to offset inflationary pressures by pushing up its selling prices.
Bellway dividend growth
As if to underline the strength of its recent business performance, the company increased its interim dividend by 29% to 45p per share. If it matches that increase when it comes to the final dividend, the prospective annual dividend per share would be £1.51. Given the current share price, that means the forward-looking Bellway dividend yield is sitting at 7%. Even if the final dividend remains the same as last year, the current yield is 5.9%. That certainly looks attractive to me.
Bellway has typically taken a conservative approach to dividend coverage. For example, last year its dividend was covered 2.7 times by earnings. That gives the company scope to keep growing its dividend even if earnings are flat. Indeed, profits could fall quite a bit and the Bellway dividend could still be payable from earnings.
So I am cautiously optimistic that, in the short term at least, there may be more growth in the Bellway dividend.
My move
But in the medium term things look less certain. So far, housebuilding as a sector has stayed strong – but can that continue?
The risks facing Bellway strike me as similar to those across its peer group. But rival Persimmon now yields 13.2%. The dividend coverage by earnings is much weaker than at Bellway, at just 1.1 times last year. But even if Persimmon halved its payout, it would still be a bit higher than the Bellway dividend is today. I see similar risks for both firms.
I have been mulling adding Persimmon to my portfolio. But with its yield and coverage levels, I also like Bellway and would think about adding it to my holdings.