I’m searching for the best dividend stocks to help me build a market-beating second income. And Berkeley Group (LSE:BKG), with its dividend yield of 5.2% for the current financial year (to April 2024), has grabbed my attention.
This reading beats the FTSE 100 average of 3.8% by a healthy margin. But of course yields are based on City forecasts that can be downgraded and can also often disappoint.
The huge challenges facing Britain’s housing market — and what this could mean for shareholder payouts — is something investors like me need to consider. Do the potential rewards of owning Berkeley shares outweigh the risks?
Good news
Investors seeking bargains have been snapping up shares in Berkeley in recent weeks. Hopes that the housing market could be on the cusp of recovery have boosted market appetite.
Improving mortgage rates in recent weeks have helped boost homebuyer affordability. And news on this front remains encouraging, meaning that declining interest from first-time buyers may be about to turn. Data on Thursday from Moneyfacts showed the average five-year fixed rate loans finally fell back below 6%.
Yet despite this good news, I’m not prepared to increase my own exposure to the housebuilding sector just yet. The outlook for the residential property market remains clouded with uncertainty, and the returns investors can expect to make remain tough to forecast.
Bad news
Berkeley is especially exposed to a housing market downturn given its focus on London and the South East. Prices here are falling especially rapidly given their statuses as some of the most expensive places to live in the UK.
Latest Halifax data showed average home prices in the capital topple 4.1% in the 12 months to August. This was the largest fall of any region in cash terms. Meanwhile, property values in the South East dropped 5% over the period, marking the largest regional decline by percentage.
Fresh trading news from Berkeley has soothed my nerves to some degree. Earlier this month it said it remained on course “to deliver pre-tax profits of at least £1.05 billion across the current and next financial years [to April 2024 and 2025]”.
The verdict on Berkeley shares
But with unemployment rising, and persistent inflationary pressures propping up interest rates, Berkeley’s earnings forecasts could well be blown off course. And this in turn puts current dividend forecasts in severe danger.
This year’s expected payout, for instance, is covered just 1.7 times by anticipated earnings. It’s a reading that falls short of the widely regarded safety benchmark of two times.
A weakening balance sheet could also give the builder less scope to pay the dividends analysts are expecting if profits disappoint. It predicted net cash of £325m as of the end of October, down from £410m in April.
There are plenty of FTSE 100 shares out there that offer market-beating dividend yields. So right now I’d rather invest my hard-earned cash elsewhere.
