7.2% yield! Here’s the dividend forecast for Barratt Developments shares

I already have it Barratt’s Development (LSE:BDEV) shares in my investment portfolio. Now it’s a way to make a healthy passive income.

At the current prices I am tempted to buy more shares FTSE 100 house builder. Barratt’s share price decline of 25%+ over the past year means a dividend yield of 7.2% and 5.2% for this financial year and next.

The figure easily beat the FTSE index average of 3.5%. And what’s more, at the current price of 472p per share, the business trades on a price-to-earnings (P/E) ratio of a rock-bottom 7 times.

But how realistic are the current dividend forecasts? And should I add more Barratt shares to my Stocks and Shares ISA today?

Cut dividends

City analysts expect the housebuilder to cut its annual dividend the second time in the next two years as the housing market weakens.

Predictions of a dividend cut also seem likely. Industry pressure has led Barratt to cut its interim payout this year by 8.9% to 10.2p per share, it announced yesterday.

Number crunchers expect to pay a total dividend of 34p in the 12 months to June 2023. This is down from the 36.9p reward shelled out last year.

In 2024, the dividend will fall again, to 24.6p.

Patchy protection?

In better news, this year’s dividend forecast is capped at expected earnings. The 2nd sitting range coincides with the 2nd and above benchmarks that investors are looking for.

However, next year’s anticipated dividend is covered by just 1.5 times projected earnings. This is well below the generally accepted level of safety. It is also within Barratt’s own cap target of 1.75 times from financial 2024.

Well, the company has a lot of cash on its books. This can help pay market-beating dividends if profits disappoint.

Net cash was more than £969m at December 31. However, this is down from the £1.1bn recorded at the same point in 2021.

Big doubts

On balance, Barratt looks set to meet City’s dividend forecast for this financial year which ends in the summer. But I am not sure that it will be able to meet the broker’s estimate for financial 2024.

Advance sales in the business have collapsed due to the cost of living crisis and rising interest rates. This fell to 10,854 homes on January 29 from 15,736 a year earlier.

It will take time to build the order book too, with the Bank of England rate hikes and the UK economy struggling. So profits can sink without a trace in financial 2024 and the cash position is very low.

Barratt enthusiastically says that he has witnessed “some early signs of improvement in trading now during January.” But despite the increase in reservation rates, he added that the market outlook remains “indefinite“.

Verdict

The long-term outlook for UK housebuilders remains solid, in my opinion. Population growth means the demand for new homes will continue to rise.

This is why I plan to hold shares now in the business. But I wouldn’t increase my holdings in the current market climate.

I prefer to buy more UK dividend stocks for market-beating passive income over the next few years.