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11.7% yield! A cheap dividend share I’m thinking of buying

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I already own shares in housebuilders Persimmon, Barratt Developments and Taylor Wimpey. But, collectively, these dividend shares account for a small percentage of my entire portfolio.

I’m considering building my exposure by investing in Vistry Group (LSE: VTY). I’m attracted by its low forward P/E ratio of 4.2 times and its 11.7% corresponding dividend yield.

Vistry’s share price has collapsed during 2022. The threat of rocketing interest rates has hung over the housebuilders for the past year. The danger has increased following the market mayhem that accompanied September’s mini-budget too.

Signs are growing that homebuyer demand is cooling as a result. And this threatens to get worse as mortgage providers pull products (and especially those that require only small deposits).

Latest data from the Royal Institution of Chartered Surveyors showed new-buyer enquiries fell for a fifth straight month in October. Chillingly, the body commented that “price expectations are now slightly negative” for the next 12 months.

Bad news

As an investor in Britain’s housebuilders, all of this news is pretty worrying. But I haven’t been tempted to sell my holdings yet. This is because I buy shares with a view to holding them for the long haul, say a decade or more.

I do need to consider however, how the deteriorating trading environment will hit housebuilder dividends in the near term. Their above-average yields are the chief reason I bought Persimmon and those other FTSE 100 shares to begin with.

As a potential investor, I’m pretty confident that Vistry will continue paying above-average dividends, even as profit risks rise. City analysts think the FTSE 250 company will pay a full-year dividend of 69.6p per share in 2022. This is covered twice over by anticipated earnings, giving a decent margin of safety in case profits forecasts disappoint.

Yet even if the full-year dividend falls short of estimates it’s likely to still be much better than most other UK shares. Vistry’s 11.7% forward yield is, after all, well above the 3.3% FTSE 250 average.

Good news

The outlook for Vistry and its peers is more perilous than it was a year ago. Yet there are also reasons for me, as an investor, to be bullish.

Weak housebuilding rates have created a huge supply shortage in Britain. This should at least stop property prices falling off a cliff. At the same time, government schemes like the low-deposit, Deposit Unlock, and recent Stamp Duty changes will support demand from new buyers.

Major lender Barclays certainly remains upbeat about the housing market. Last week, it said that “higher interest rates are expected to adversely impact the housing markets in major economies”. However, it added that “house price growth remains positive over the forecast horizon [to 2026]”.

The verdict

I think the outlook for Vistry remains ultra-bright. And its planned merger with Countryside Properties could supercharge its profitmaking ability in the years ahead.

That said, I’ll wait until the medium-term outlook for housebuyer demand becomes clearer before buying the builder. I will add it to my shopping list with a view to snapping it up later on.

The post 11.7% yield! A cheap dividend share I’m thinking of buying appeared first on The Motley Fool UK.

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Royston Wild has positions in Barratt Developments, Persimmon, and Taylor Wimpey. The Motley Fool UK has recommended Barclays. 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.