Building an income stream

On the day that RICS announced a further deterioration in the housing market in the UK with the fastest decline in the sentiment of its members since July 2005 it would seem strange for me to turn my attention to house builders.

However, investors and savers that are familiar with my style will know that i love nothing better than a good counter intuitive play.

So the housing market is slowing down. At long last many would say. "Will it crash?". Probably not unless the wider UK economy hits the buffers. Highly unlikely with all the young immigrants that are entering our economy, working hard for very little and spending! I digress.

The fact is share prices in house builders have been savaged since the beginning of the year as firstly the slowdown and the sub-prime crisis has rocked confidence in property markets in the US and now here in the UK.

The result is that many of the major UK house builders share prices are trading at less than 50% that they were at earlier in the year. I look below at several that particularly appeal to me and might be attractive to other investors and savers.

Barrat Developments
This household name synonymous with mass suburban estates was transformed by the recent take over of Wilson Bowden into the UKs largest house builder. It now has over 5 years land supply and just under 110,000 plots of land. Recent figures for the year ending June 07 were strong. Showing earnings and dividends up although profit margins fell from 17% to 16.7%.

The main interest for the income investor is the substantial dividend. The projected dividend of just under 39p for 08 equates to about 7.5%. On a P/E of under 5 and with a projected dividend cover of just below 3 this dividend looks very safe in the short/medium term.

HIGH 1296 LOW 514 CURRENT 515
PROJECTED YIELD 7.6%

Taylor Wimpey
This builder has a number of recognised UK brands including George Wimpey, Laing and Bryant. It also has interests in the US and Spain. It now claims to be the UKs largest house builder. The latest trading statement at the end of October warned of deterioration's in the US and Spain although it was positive about the integration of its two merged UK businesses of Taylor Woodrow and George Wimpey.

On current projection to the end of the year. The shares have now gone ex-dividend but on next years forecast earnings of over £500m they are projected to pay about a 17p dividend more than twice covered by income and equating to a mouth watering 8.3% yield.

HIGH 518.5 LOW 201.5 CURRENT 205.75
PROJECTED YIELD (08) 8.3%

Others
Other house builders investors and savers could look at are: Bovis with a projected yield of 6.5% for next year and Persimmon on a prospective yield for next year of 6.6%.

INCOME MONKEY VERDICT
The market is clearly right to worry about a slowdown in the housing market impacting on house builders profits. However, we think the sell off is over done. Gordon Brown wants 3 million new homes built by 2010. Who do you think is going to build them - the Government? Not on your life. The only people to do this are the big house builders who incidentally control most of the development land. The fact is the builders only build when they can make a decent profit and if they don't build supply of housing remains even tighter forcing up house prices until they do make an acceptable margin. The house builders control the new build market & the government cant or haven't the political guts to do anything about it so buy for dividend now before the rest of the lemmings realise they have made a mistake by selling too cheaply.