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Thanks to the stock market correction of 2022, finding stocks with a high dividend yield is not as difficult as it was a year ago. Don’t forget that when stock prices fall, returns rise. And that creates countless opportunities for astute income investors.
One stock in particular that caught my eye this week is ibstock (LSE:IBST). The company is one of the UK’s largest manufacturers of clay bricks, along with other types of building materials.
Given that the home construction market is slowing down, this might seem like a pretty strange choice. However, after taking a closer look, its current 5% payout to shareholders not only looks sustainable, but could see significant growth over the next decade.
Investigating the 5% Dividend Yield
With interest rates rising to combat inflation, mortgages have quickly become more expensive. This has started to push residential property prices down, which is bad news for homebuilders as material costs remain high.
Consequently, construction rates have slowed and the S&P Global/CIPS UK Construction Purchasing Managers’ Index dropped to 48.8 in December 2022. As a reminder, anything below 50 means the home construction market is contracting.
So imagine my surprise when I see Ibstock, a critical supplier to the UK residential construction sector, announce that business performance is significantly above expectations.
The brickmaker has proven to be almost completely resilient to the downturn in the market for one simple reason. The UK is in the midst of a clay brick shortage. Even with the recent recession, there is still a lot of demand with minimal supply.
Looking at its latest interim results, revenue rose 28%, operating profit 25% and dividend per share jumped from 2.5p to 3.3p. All of this suggests that its current 5% dividend yield is sustainable. Also, with plenty of excess cash, management has launched a £30m share buyback program to take advantage of its depressed valuation.
Since long-term demand for homes is unlikely to die down, Ibstock could be an excellent source of passive income for the next decade. At least, that’s what I think.
What are the risks?
Like any investment, there are always risks to consider. And when it comes to identifying high-yield dividend-winning stocks, investors need to be on the lookout for threats.
In the case of Ibstock, it is still prone to market contraction. If demand falls enough, brick shortages may no longer be a sufficient buffer to protect the group’s cash flow. While this is a short-term issue, its uncertainty could send Ibstock shares down further.
Another risk factor that caught my attention is the level of domestic spending. Management is in the process of making some significant investments to expand production capacity. And the costs of doing so are starting to add up.
One project in particular is its new net-zero carbon brick foundry in Walsall. The original anticipated cost was £60 million. But now, management expects a further £15m will be required to complete the project by the end of 2023. If costs continue to rise over the next 12 months, the project may destroy shareholder value and compromise dividend yields.
However, Ibstock appears to be in a strong financial position, with plenty of long-term growth and earning potential. That is why I am considering this business for my Stocks and Shares ISA once I have more capital available.
