This article will look at three of our favorite ways for investors to profit from a rising housing market. These are not homebuilder stocks, but instead represent companies that have business models that will benefit from continued growth in home construction and new and existing home sales. This list includes two companies that have overcome the cyclicality of the housing sector to increase dividends to shareholders for at least 25 years, qualifying them as Dividend Aristocrats. You’ll learn the key details about these dividend stocks.
The housing market in the United States has been booming over the past few years, with the market accelerating in recent times. Some of this has to do with pent up demand following the pandemic and the stimulus checks, which many consumers spent on improving their homes.
The housing market continues to improve, marked by rising home prices, and there are few signs of a slowdown. Now that the worst of the pandemic appears to be behind us, people are looking to return to a more normal way of life, which for many includes buying a new home. Existing home sales are showing immense growth as homes put up for sale tend to spend an average of a month on the market and receive multiple offers as opposed to previous wait times of 60 to 120 days.
According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, building permits for privately owned housing units totaled 1,681,000 for the month of May. While this is a slight decline sequentially, it was a nearly 35% increase on a year-over-year basis. With this demand in building permits, the prices of lumber, copper and other building materials became very expensive. Prices for building materials have pulled back slightly, but still remain historically high as the housing boom continues.
Putting it all together, the following three dividend stocks will benefit greatly from rising home prices, and shareholders will benefit in turn through dividend growth and higher share prices down the road:
Dividend Stocks in Housing: Caterpillar Inc. (CAT)
The first of the dividend stocks we’re discussing, Caterpillar is the global leader in construction and mining equipment. The $117 billion market capitalization company also provides diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company produced revenue of just under $42 billion last year.
As the world’s largest producer of earth-moving equipment, a continued housing boom greatly benefits the company’s business. The opposite was seen in 2020 as Caterpillar had a 47% decline in earnings-per-share as dealers and customers became more cautious during the pandemic.
We can expect that the growth in construction, not just in the U.S., but worldwide, will allow Caterpillar to grow earnings-per-share by more than 40% in 2021. This would leave the bottom line still much lower than its pre-pandemic highs, but it would be a very good showing nonetheless.
This return to growth will also help to ensure that Caterpillar’s dividend growth streak continues. Following an 8% dividend increase for the upcoming Aug. 20 payment date, the company has now raised its dividend for 28 consecutive years. This is an impressive accomplishment for a company that is so tied to the health of the economy. Previously, Caterpillar had paid the same dividend amount for eight straight quarters. The company’s dividend has a compounded at an annual rate of 8.88% over the last decade.
Shares of the company yield just over 2% at the moment. While below the stock’s 10-year median yield of 2.5%, Caterpillar’s yield is superior to the approximate 1.4% average yield of the S&P 500 index.
With a new annualized dividend of $4.44 and our expectation for earnings-per-share of $9.20 for 2021, Caterpillar has a projected payout ratio of 48%. This is slightly above the average payout ratio of 45% since 2011. The dividend appears to be well-covered and unlikely to be cut even if earnings-per-share experience another significant decline.
Leggett & Platt (LEG)
Leggett & Platt has a wide-ranging portfolio of engineered products, including furniture, bedding components, adjustable beds, store fixtures, steel wire and vehicle seat support systems. The company is valued at almost $7 billion and generated revenue of $4.3 billion in 2020.
Adjusted earnings per share fell 17% last year as the company felt the impact of the Covid-19 pandemic, but we believe that 2021 will be a much better year for the company. We project that Leggett & Platt will earn $2.65 this year, which would be a 24% increase from the prior year and a new high for the company. A strikingly fast turnaround appears possible for the company, a sure sign of its strength.
Leggett & Platt maintains a leadership position in a very fragmented industry, which gives it an advantage over small players. Helping matters is that there are few larger competitors in many of the categories in which it competes. Leggett & Platt has augmented its leadership position by acquiring smaller companies that competed against that have shown to grow its market share. These strengths should enable the company to produce a new high for earnings-per-share this year.
This business model has paved the way for 48 consecutive years of dividend growth, placing the company just two years shy of achieving Dividend King status. Shareholders will see a 5% increase in their dividend payments starting on July 15. The last raise is above the dividend’s compound annual growth rate of 4.1% over the last decade.
Leggett & Platt offers a high yield of 4.3% today, which compares favorably to the 5-year average yield of 3.3%. The current yield is also more than 200 basis points above the average yield of the market.
The new annualized dividend of $1.68 would consume 63% of our expected earnings per share for the year, somewhat below the average payout ratio of 75%. Leggett & Platt’s payout ratio looks to be in good shape and the company has a tremendous history of growing dividends. With a strong business model and long history of growth, we believe that shareholders are more than likely to continue to see higher dividend payments for years to come.
Dividend Stocks in Housing: M.D.C. Holdings (MDC)
The last of the dividend stocks we’re discussing today, M.D.C. Holdings is composed of two segments, homebuilding and financial services. The homebuilding arm of the company, Richmond American Homes, focuses on acquiring lots that are finished or can be developed for the purposes of construction and sale of single-family detached homes. These homes are targeted to first-time and move-up homebuyers. The financial services segment provides mortgage loans, mostly to its homebuyers. Annual revenues totaled $3.9 billion last year and M.D.C. Holdings is valued at $3.7 billion today.
M.D.C. Holdings bucked the trend of the other names in this article and demonstrated tremendous growth last year. Revenue grew 18% and earnings per share improved 50% in 2020.
The company was able to do so well in an otherwise very challenging year for most others because it benefited from limited supply. M.D.C. Holdings’ focus on more affordable price points and its build-to-order business model place the company in an advantageous spot compared to many in the same industry. Limited supply and higher demand at the present have allowed the company to bring more inventory to market while also raising prices. We predict that M.D.C. Holdings will see diluted earnings per share grow 25% to $7 this year.
M.D.C. Holdings paused its dividend following the Great Recession as the business fluctuated greatly following the last housing crisis. That said, the company has compounded its dividend at a rate of 12.4% over the last three years. The most recent raise increased the dividend by 21% and marks five years of dividend growth. The latest raise was the second increase in the past four quarters. The dividend payment made May 26 was around 30% higher than the payment from the same quarter a year ago.
M.D.C. Holdings yields 3.1%, a generous level of income given the current low yield environment but slightly below the stock’s 5-year average yield of 3.5%.
Shareholders should see at least $1.60 in dividends in 2021. Using our expectations for earnings-per-share, M.D.C. Holdings has a projected payout ratio of just 23%, lower than the five-year average payout ratio of 36%. The combination of excellent business execution, a low payout ratio and management’s commitment to high levels of dividend growth has us believing that M.D.C. Holdings will continue to provide dividend increases to shareholders going forward.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.