While the rest of the economy continues to advance thanks to the boost of artificial intelligence (AI) data centers, the real estate sector has been stagnant. Activity has slowed due to high mortgage rates, falling home prices and lower immigration, all factors working against the sector. Two of the main housing construction actions, Lennar(NYSE: LEN) and Dr Horton(NYSE: DHI)have seen their share prices fall 49% and 29%, respectively, from all-time highs due to these macroeconomic headwinds.
Earnings are expected to remain weak in 2026, but smart long-term investors know that market weakness can be a good time to buy cyclical stocks of otherwise strong companies. Here’s why these two homebuilders are still great dividend stocks that you can buy today and keep forever in your portfolio.
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Lennar’s nearly 50% drop is exemplified by the rise and fall of the average sales price of its homes across the United States. Before the pandemic, Lennar’s average selling price (ASP) was just above $400,000, then jumped to a high of $478,000 in 2021. Today? Even amid high inflation, its ASP has fallen below pre-pandemic levels to $376,000.
With rising input costs, a lower ASP will impact Lennar’s profitability, with gross margins down to 17.6% in the trailing 12 months compared to around 30% at their peak. This is likely due to stubbornly high mortgage rates, which remain above 6%. Buying a home at that price has become unaffordable for more Americans. To encourage purchases, Lennar has had to lower the sale price of homes.
In addition to this financial pressure, Lennar is being affected by the current negative net migration to the United States. The fewer people who come to the country looking for housing, the less demand there will be for certain types of housing, other things being equal.
While this may create uncertainty in the short term, Lennar’s leadership position in housing should remain stable over the next decade. As of this writing, the stock is trading at a price-to-earnings (P/E) ratio of just 12 due to depressed earnings. Once mortgage rates, real estate activity, and immigration headwinds subside, Lennar’s earnings should start growing again, making it a cheap contrarian stock that investors can buy right now.
Like Lennar, DR Horton is a homebuilder negatively impacted by these macroeconomic headwinds, with falling ASPs hurting its profit margins. Gross margin has closely followed Lennar, although it has structurally higher profit margins due to its business model of land options rather than direct land purchases before building. Its gross margin has fallen from more than 30% to 23.3% in the last 12 months due to a drop in ASP and a simultaneous rise in inflation.
Looking at DR Horton and Lennar’s financials, they are poised to deliver value to shareholders who can see the forest through the trees. Both stocks are generating positive free cash flow despite this difficult homebuilding environment, although their different business models lead to different financial performance. DR Horton’s low-equity land option model has generated $3.5 billion in free cash flow over the past 12 months, while Lennar’s has shrunk to $309 million due to its initial investments. However, Lennar is transitioning to a land option model to improve cash conversion.
Over the long term, both stocks have consistently generated positive cash flow for shareholders, allowing them to return capital and increase dividend payments.
Through share buybacks, both companies are implementing a perfect dividend growth model. As a company buys back shares from existing shareholders, its shares outstanding decrease, allowing it to support a higher dividend per share with the same nominal dividend commitments. In the last five years alone, Lennar and DR Horton’s outstanding shares have fallen about 20%.
It’s this steadily declining number of shares that has helped both stocks become superb dividend producers. Lennar’s dividend per share has increased 1,220% over the past 10 years, while DR Horton’s has increased 462%. As companies continue to buy back shares at these reduced prices, management can continually increase dividend payments to shareholders.
Once the housing market normalizes over the next few years, Lennar and DR Horton should see a strong recovery in earnings, which would make them excellent buys on that basis as well. These are fantastic dividend stocks that any investor will be happy to hold in their portfolio for the next decade.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions and recommends DR Horton and Lennar. The Motley Fool has a disclosure policy.
2 Great Dividend Stocks Down 27% and 47% to Buy and Hold Forever was originally published by The Motley Fool
