Income investing focuses on investments such as bonds, which can
provide a steady stream of income. Meanwhile, investing in income stocks would mean scouting out stocks of companies that pay a
solid dividend.
Usually, established companies, which have seen their growth plateau, pay dividends. The logic is these companies do not have
before them profitable reinvestment options and are therefore forced to distribute the retained earnings in the form of
dividends.
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In order to decide among income stocks, instead of comparing the absolute dollar value of the dividends, one can calculate a
metric called dividend yield. Dividend yield is nothing but the annual dollar dividend divided by the stock price, which is a
measure of return that a dividend gives to the shareholders.
Dividends And Homebuilders
Recently, Toll Brothers Inc (NYSE: TOL)
said its board has approved the initiation of a quarterly dividend of $0.08 per share. The first dividend is to be paid on April
28, to shareholders of record on the close of business on April 14. The current dividend yield of Toll
Brothers calculated based on last Wednesday's closing price is 0.94 percent.
For an income investor, who is on the lookout for homebuilders, which have the best dividend yield, here is the arithmetic:
-
KB Home (NYSE: KBH): 0.59 percent (based
on quarterly dividend of $0.025).
-
Lennar Corporation (NYSE: LEN): 0.34
percent (based on quarterly dividend of $0.04).
-
PulteGroup, Inc. (NYSE: PHM): 1.67 percent
(based on quarterly dividend of $0.09).
-
D.R. Horton, Inc. (NYSE: DHI): 1.16
percent (based on quarterly dividend of $0.10).
Among the other homebuilders, Hovnanian Enterprises, Inc. (NYSE: HOV), Beazer Homes USA, Inc. (NYSE: BZH), Taylor Morrison Home Corp (NYSE: TMHC), NVR, Inc. (NYSE: NVR), Meritage Homes Corp (NYSE: MTH), LGI Homes Inc (NASDAQ: LGIH) and Comstock Holding Companies Inc (NASDAQ: CHCI) do not pay dividends.
PulteGroup has the highest dividend yield in the sector followed by D.R. Horton and Toll Brothers. Nevertheless, the dividend
yields of homebuilders are lower than the average dividend yield of 1.93 percent for the S&P 500 Index.
Homebuilders, after all, do not look like offering shelter to income investors. However, with fundamentals improving and
payout ratio ( ratio of dividend paid to earnings) remaining low, there is scope for these companies improving on their dividend
yield in the coming days. Toll Brother's initiation of dividend, therefore, could be a harbinger of a better payout environment in
the future.
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