How Dividend Investors Can Play This Real Estate Trend

Includes: DHI, LEN, PHM
by: Insider Monkey

By Jake Mann

Over the past week, we have discussed few different cases of how potential catalysts can affect certain segments of the economy, and one theme we haven't discussed yet is real estate here in the States.

According to a press release earlier this week, the Standard & Poor's/Case-Shiller home price index rose by 12.3% in July (yoy, 10-city composite). This is the largest annual increase since 2006 as The Wall Street Journal points out, and nearly all indicators of housing market prosperity-from foreclosures to fixed-mortgage rates-look promising. The healthiest cities in terms of price appreciation from the previous year were Las Vegas, and San Francisco. Eastern cities Atlanta, and Miami, also registered strong growth, as did Detroit. Generally speaking, there's not one specific geographical region that stands out in particular.

With that in mind, it's useful to think about how dividend-seeking investors can play this trend. Sure, it's tempting to look at high-growth smaller-cap names that might offer the most upside on a continued recovery in housing, but for most investors, dividends are essential. Surprisingly, there's a heck of a lot of growth available in the homebuilding stalwarts.


Lennar (NYSE:LEN) CEO Stuart Miller was on Mad Money earlier this week, and his words did nothing short of ring the dinner bell on the stock for investors who were watching. Miller told Jim Cramer a few important things, but his bullish thesis behind Lennar amounted to a few specific factors: 1) it is still receiving orders to "fill the hole" in inventory that's a result of the last recession, 2) the company's Rialto and apartment rental divisions are "longer term shareholder value machines" that will mature "in the next few years," and 3) regardless of short-term interest rate fluctuations, the "steady rebound in housing" should continue over the next few years.

Wall Street estimates that Lennar is set to grow earnings by almost 30% next year, higher than what's expected of peers D.R. Horton (NYSE:DHI) at 25%, and PulteGroup (NYSE:PHM), at 19%. As Cramer discussed with Stuart Miller, Lennar's executive planned estate service, Rialto, is an important piece of the homebuilder's growth picture, and its recent earnings call affirmed that it can now retire its existing debt. The company's multi-family rental communities are expected to have a "meaningful contribution" to Lennar's financials by its 2015 fiscal year.

At the end of the day, Lennar offers the best growth prospects in the sector, and its dividend yield above 0.4% isn't too far off the likes of D.R. Horton (0.7%) and PulteGroup (1.1%). Lennar's payout ratio is a mere 7.5% - about half that of Horton - and we view the improving debt picture at its Rialto business as a primary reason why dividends could be boosted in the coming year.

Lennar has seen one insider purchase in the past three months and a whopping 15 of the top-tier hedge funds we track established new positions in the company last quarter. Israel Englander and Rob Citrone are a couple of the managers who are newly bullish on the homebuilder, and it's likely a result of one or more of the aforementioned factors.

D.R. Horton and PulteGroup

It's worth mentioning that even though Lennar offers slightly better growth prospects than D.R. Horton and PulteGroup, the combination of positive macroeconomic factors at play makes these two peers worth a look as well. The benefits of higher home prices and rising home construction are being augmented by interest rates that are still far below long-term norms. The national rate on a 30-year fixed mortgage is near 4.3%, about two full percentage points less than pre-recession averages this century.

In D.R. Horton's latest earnings call, it reported its best third quarter since 2006, and like Rialto for Lennar, its Emerald luxury homes segment is expected to be a driver of longer term growth.

PulteGroup is in a similar boat, and it gives the added bonus of a recently approved share buyback that now totals close to $350 million and a higher dividend yield than both of its peers. Although these capital return strategies may have a direct effect on future growth (as is evident by the aforementioned analyst growth estimates), Pulte actually provides a nice compliment to D.R. Horton and Lennar for this very reason.

Lennar, Horton and Pulte each sit at a different spot on the spectrum between growth and income, and all three trade at an earnings multiple below Ben Graham's sweet spot of 15. We'll continue to watch this space closely, and the bevy of bullish factors at play here makes this homebuilding trio worth any dividend investor's time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Jake Mann, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.