Dividend yields soar as building sector dives

On a day of falling share prices for Travis Perkins, Taylor Wimpey, and Safestyle, it's easy to feel the gloom concerning all things property.

These are clearly much tougher times, but that doesn't mean investors should switch off to the attractive dividend potential contained within today's announcements.

Taylor Wimpey, for example, reminded investors about the £500 million total dividend it intends to pay for 2018, including £340 million in the shape of a special dividend in July.

And even if things do get harder for housebuilders, Taylor has pledged to continue providing "a reliable dividend stream for our investors through the cycle." This is likely to include further material capital returns in 2019 and beyond. The forward yield is currently above 8%.

Taylor Wimpey shares were down as much as 5% today, even though chief executive Pete Redfern said the company had made a good start to 2018 with an order book value broadly in line with the same stage last year. Underlying profits were up 10.7% to £812 million in 2017.

At Travis Perkins, the dividend for 2017 announced today of 46p is a 2.2% increase on 2016.

While this reduces dividend cover to 2.4 times adjusted earnings per share (EPS) - below the company's target range of 2.5x to 3.25x - Travis said the dividend award highlighted its confidence that it will continue to generate strong levels of cash.

Shares, however, were 8% lower today as the company said the prospect of more uncertain market conditions meant that its performance in 2018 will be similar to 2017, when underlying profits were down 10% at £343 million.

This hasn't been the usual winter share price performance from the builders' merchant, which features alongside Taylor Wimpey in our Aggressive Winter Portfolio.

Winter Portfolio - winners revealed!

The five-strong list is made up of those shares with the biggest average annual returns over the past decade. In the case of Travis Perkins, it recorded an average return of 24% after growing in seven out of the last 10 winters.

But with two months left, Travis shares are down 13% in the period since November. Taylor Wimpey is also down 6%, highlighting the difficult conditions facing investors this winter.

Windows and doors firm Safestyle represents a more intriguing dividend story, having made a string of profit warnings that have left its share price at a record low.

Another warning came today as the company said revenues and underlying profit for the 2018 year will be materially below 2017 levels and current market expectations.

However, Safestyle continues to generate plenty of cash and, with a robust balance sheet, still expects to declare a final dividend for 2017 of 7.5p.

House broker Zeus Capital thinks that the dividend could remain at 11.3p for the next couple of years as the company focuses on restructuring its operations in order to address heightened competition.

Joint broker Liberum does too. Analyst Charlie Campbell says: "We believe that if the disruption from the new entrant has stabilised and the benefits of rationalisation are coming through, then management is likely to maintain the dividend in 2018, even if cover is quite slim (on our estimates only 1.03x in 2018E), given the strength of the balance sheet and cash flows.

"We expect free cash generation to trough at around £9m in 2018E, which should support a valuation of around £106m (at 8.5% FCF yield) with net cash of around £11m by the end of 2018E giving a potential market capitalisation of around £117m (or 140p per share).

"Our target price of 130p (from 200p) aims off this somewhat to reflect that the stock market is likely to take a prudent view - at 130p the shares would trade at around 11x cal 2018e price/earnings ratio."

This means the shares are currently offering an attractive yield of around 9.5%. One for the braver income seekers.