Five of the Best Dividend-Paying Home Building Stocks to Purchase For Post-pandemic Economic Growth

Five of the best dividend-paying home building stocks to purchase for post-pandemic economic recovery from COVID-19 give investors an opportunity to profit from rising demand for residential real estate.

The five best home building stocks to purchase feature companies engaged in residential real estate that also serve important niches in the industry. Home builder optimism remains steady and demand is strong, with the Housing Market Index from the National Association of Home Builders (NAHB) climbing in April to 83, up from 82 in March.

Low Interest Rates and Economic Recovery Aid Five of the Best Dividend-paying Home Building Stocks to Purchase

“I do believe that home builders are going to benefit as interest rates stay low and the economy recovers from the pandemic,” said Bob Carlson, who chairs the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets. “They’re also going to benefit longer term as the millennials age into prime home-owning years.”

Of course, home builders’ profitability is hurt by shortages of labor and materials, said Carlson, who also heads the Retirement Watch investment newsletter. But labor and materials shortfalls help to avoid overbuilding and keep demand high, he added.

Pension fund and Retirement Watch leader Bob Carlson answers probing questions from Paul Dykewicz prior to COVID-19-related social distancing.

One way to gain exposure  in the sector is by investing in SPDR S&P Homebuilders (XHB), a dividend-paying exchange-traded fund (ETF) that is up about 28.16% so far this year after zooming 129.15% during the past 12 months, said Carlson, who added he favors investing in a fund rather than individual home builder stocks. SPDR S&P Homebuilders is intended to provide investment results that correspond generally to the total return of the S&P Homebuilders Select Industry Index, before fees and expenses.

XHB, which trounced its category’s 27.54% return and its index’s 54.98% gain during the past year, seeks to give investors exposure to the home builders segment that consists Building Products, Home Furnishings, Home Improvement Retail, Home Furnishing Retail and Household Appliances. The fund also tracks a modified equal-weighted index to allow for unconcentrated industry exposure across large, mid- and small-cap stocks.

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Lennar Corp. Wins Spot Among Five of the Best Dividend-paying Home Building Stocks to Purchase

“The housing market is perhaps hotter than any time since the late 2000s, only this housing boom isn’t based on funny money mortgages,” said Jim Woods, editor Successful Investing, Intelligence Report and Bullseye Stock Trader. “Rather, the metrics in the housing market are so positive because of a bullish combination of near-record-low borrowing rates on new homes, and what I call the COVID-19 pandemic flight to the suburbs that has stimulated home buying away from dense urban areas.”

Woods told me that that dividend-paying homebuilder Lennar Corp. (NYSE:LEN) is taking advantage of these bullish housing conditions.

“The company is one of the country’s biggest homebuilders, as it builds single-family homes, rental properties and commercial real estate in 21 states,” Woods said. “That mix of in its core business has helped LEN see its earnings growth surge, and last quarter its year-over-year EPS growth was 61%. That earnings power of late, as well as over the past several years, has put LEN in the top 5% of all public companies in terms of earnings growth.”.

Columnist and author Paul Dykewicz meets with stock picker Jim Woods before COVID-19.

On March 17, LEN shares spiked some 13% after the company reported outstanding fiscal first-quarter results. But one key announcement by the company that pleased traders was its decision to spin off some of its ancillary businesses, such as its multifamily business and technology startups. While management offered no clear timeline for the spin-offs, what the announcement did is reassure Wall Street that management will focus on the company’s bread-and-butter businesses. Moreover, the spinoffs will help smooth LEN’s earnings volatility going forward.

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Advanced Drainage Systems Joins Five of the Best Dividend-paying Home Building Stocks to Purchase

Advanced Drainage Systems Inc. (NYSE:WMS), a Hilliard, Ohio-based manufacturer of plastic corrugated pipes and other drainage products, has soared 242.29% in the past year, soundly beating its sector’s 134.45% return and its index’s 57.39% gain for the same period. The company reported improving financial performance on Feb. 6, when its management held its third-quarter fiscal 2021 earnings conference call.

“We delivered another quarter of record financial performance in the third quarter of fiscal 2021,” D. Scott Barbour, president and chief executive officer of Advanced Drainage Systems, said during the call. “Sales grew 24% year-over-year, driven by 17% non-residential sales growth and 36% residential sales growth.”

Revenues across each of the company’s end markets increased double-digit percentages in the fiscal third quarter, as demand in its non-residential market jumped 17%. Advanced Drainage Systems continues to benefit from growth in horizontal construction, such as warehouses, distribution centers, data centers and developments that follow the residential build-out.

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Drainage Company Earns Place Among Five of the Best Dividend-paying Home Building Stocks to Purchase

Strength showed in the regions where the company has achieved growth, such as the Atlantic Coast and Southeast, Barbour said. The company also rebounded in regions like the Northeast and Western United States that had been softer this year, Barbour said.

In addition, allied product sales in the non-residential market increased 23%, boosting confidence in the underlying market strength. The company also continues to experience strength in its residential market with 36% growth in the quarter, driven by favorable dynamics in new home construction, repair/remodel and on-site septic, accelerated by the material conversion strategies at both businesses.

“Our indicators are showing that homebuilders continue to acquire land for future development and that there’s an overall shortage in available homes,” Barbour said.

Five of the Best Dividend-paying Home Building Stocks to Purchase also Helped by Demand for Remodeling and Home Improvement 

The retail market, which is roughly 25% of the company’s residential sales, continues to experience strong growth, as well show continued demand for remodeling and home improvement, Barbour continued.

BoA Global Research set a price objective of $117 on WMS shares, based on fiscal year 2022 estimates for an adjusted enterprise value (EV) / earnings before interest, taxes, depreciation and amortization (EBITDA) multiple of roughly 17x — near the top end of the company’s historical range. Downside risks to that price target include a potential slowing in non-residential construction, U.S. single-family starts falling below historical trend, fairly high financial leverage relative to its building product peers, market challenges in Canada & Mexico, concentration of voting power and customers, rising raw material costs, slowing material conversion trends within key markets and a slowing U.S. economy.

Positive factors that could help the stock include a reacceleration in non-residential construction, declining raw material costs and a quickening of material conversion trends within key markets, BoA concluded.

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Five of the Best Dividend-paying Home Building Stocks to Purchase Also Include Armstrong World Industries

Lancaster, Pennsylvania-based Armstrong World Industries, Inc. (NYSE:AWI), a designer and manufacturer of walls and ceilings, has a global manufacturing network of 26 facilities and a modest $98 price objective on it from BoA. AWI’s 2021 estimated P/E multiple of roughly 24x also is within the dividend-paying company’s historical valuation ranges since spinning off Armstrong Flooring in April 2016.

However, 2020 proved very challenging for many companies, including high-quality commercial construction focused manufacturing entities like AWI. BoA historically and to this day continues to view AWI among the best positioned, most resilient companies throughout a cycle.

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Downside risks BoA cites are: 1) weaker than anticipated commercial construction activity, 2) slower than forecast share repurchases, 3) weaker than expected economic growth in North America, 4) a resurgence in COVID-19 outbreaks that leads to another round of construction market closures, 5) slower-than-expected return to the office, and 6) less municipal spending dedicated to non-residential rest and relaxation (R&R).

However, BoA provides reasons for optimism, too. The reasoning includes the potential for 1) stronger than anticipated recovery in commercial construction, 2) faster-than-expected recovery in mineral fiber AUV, 3) weaker-than- expected economic growth in North America, 4) an unexpected decline in COVID-19 cases, 5) faster-than-expected return to the office and 6) strong municipal spending on R&R for schools and other projects.

D.R. Horton Featured Among Five of the Best Dividend-paying Home Building Stocks to Purchase

D.R. Horton, Inc. (NYSE:DHI), America’s largest-volume home construction company, is headquartered in Arlington, Texas, and jumped 143.05% during the past 12 months to beat the 137.91% return of its sector and the 57.39% rise of its index. BoA set a $103 price objective on dividend-paying D.R. Horton’s shares, based on a fiscal year 2021 estimated price-to-earnings (P/E) multiple of roughly 11.5x, which implies a price/book multiple of roughly 2.9x.

At 11.5 x P/E and 2.9 x P/B, DHI would trade within its five-year valuation range, which BoA stated was appropriate given an improving homebuilding market that is offset by lingering economic risk due to COVID-19 and market fears of the potential for peak earnings in 2021. However, BoA cites downsides risks that include macro headwinds affecting first-time buyers, gross margin pressure on home sales or buying a greater percentage of land on option.

DHI also is at risk due to its speculative building strategy that may force it to discount prices, if demand is softer than expected. Other potential risks include a large and sustained increase in raw material costs, a continuing spike in mortgage rates, potential unwillingness to return value to shareholders through increased dividends and share repurchase and a slowing U.S. economy, according to BoA.

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KB Home Earns Place Among Five of the Best Dividend-paying Home Building Stocks to Purchase

Dividend-paying KB Home (NYSE:KBH), a Los Angeles-based homebuilding company, has been given a $54 price objective on its share price by BoA, based on a fiscal year 2021 estimated P/E multiple of roughly 9.5x. At 9.5 x P/E and 1.7 x P/B, KBH would trade within its recent historical valuation range, which BoA stated would be appropriate due to a solid housing market, offset partly by lingering risk of further COVID-19- induced economic slowing, market concerns about the potential for peak earnings in 2021 and growing affordability concerns.

Possible upside for KBH includes better-than-expected gross margins, faster-than-anticipated improvement in return on equity, de-leveraging through debt paydown, better-than-expected pricing power and better-than-expected leverage for its selling, general and administrative (SG&A) expenses.

BoA also listed the following downside risks: cost pressures on gross margins, slower-than-anticipated improvement in return on equity, an inability to de-lever its debt, softer-than-expected pricing power, worse-than-expected SG&A leverage and a weakening U.S. economy.

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Money Manager Kramer Picks Custom Harbor Custom Development for Five of the Best Home Building Stocks to Purchase

“Home builders were so busy in many parts of the country that they were actively turning business away early this year and it’s going to take at least a full construction season to work through that backlog,” said Hilary Kramer, who hosts the nationally aired “Millionaire Maker” radio program and leads the GameChangers and Value Authority advisory services. “Likewise, mortgage brokers haven’t slowed down even though 30-year rates have rebounded about a half percentage point from the record low 2.66% that fed last year’s boom. Believe it or not, housing is still about as hot as it gets.”

Paul Dykewicz conducts a pre-COVID-19 interview with Hilary Kramer, whose premium advisory services include IPO Edge, 2-Day Trader, Turbo Trader and Inner Circle.

With that in mind, it’s no wonder that broad thematic portfolios like the S&P Homebuilders ETF doubled over the past year and are up nearly 30% so far this year, Kramer continued. Longtime shareholders are “thrilled,” but a question remains about which stocks still have upside, she added.

“I’d start with the ones that are either too new to be heavily weighted in institutional portfolios or have lagged their peers,” Kramer said. “My top name in both categories is Harbor Custom Development Inc. (NASDAQ:HCDI), which went public in August and has quickly become one of my favorites.”

The non-dividend-paying company builds high-end and unique homes in Puget Sound, Washington. Pursuit of such an affluent niche indicates its margins can absorb inflation on the materials side, Kramer continued.

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COVID-19 Fails to Tank Five of the Best Dividend-paying Home Building Stocks to Purchase

COVID-19 vaccination progress in recent months raises hope among many people who tired of lockdowns that new cases caused by the virus may begin to slow rather than surge. Further optimism comes from the Food and Drug Administration (FDA) recently approving a third COVID-19 vaccine with Johnson & Johnson (NYSE:JNJ) to quicken the pace yet further at which people can be vaccinated. However, JNJ has faced some recent setbacks that include manufacturing problems that have limited its near-term prospects for fulfilling its potential as a vaccine maker.

U.S. COVID-19 cases have reached 31,565,262 and led to 566,088 deaths, as of April 16. COVID-19 cases worldwide have soared to 139,508,140, with deaths totaling 2,992,388, according to Johns Hopkins University. America is the nation that has reported the most COVID-19 cases and deaths by far.

Five of the best dividend-paying home building stocks to purchase give investors choices for how to profit from the $1.9 trillion federal stimulus package, increased COVID-19 vaccine availability and the ongoing economic reopening. Those three catalysts position five of the best dividend-paying home building stocks to purchase for further gains during the rest of 2021 and beyond.