2 Magnificent Dividend Stocks Down 27% and 47% to Buy and Hold Forever

While the rest of the economy keeps chugging along with a boost from artificial intelligence (AI) data centers, the housing sector has been in the doldrums. Activity is down due to elevated mortgage rates, falling home prices, and lower immigration, all headwinds for the sector. Two of the leading homebuilding stocks, Lennar (NYSE: LEN) and D.R. Horton (NYSE: DHI), have seen their share prices drop 49% and 29%, respectively, from all-time highs because of these macroeconomic headwinds.

Earnings are expected to remain weak in 2026, but smart long-term investors know weakness in the market can be a great time to buy in on cyclical stocks from otherwise strong companies. Here's why both of these homebuilders remain magnificent dividend stocks you can buy today and hold forever in your portfolio.

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A housing slump will eventually turn the corner

Lennar's near-50% drawdown is exemplified by the boom and bust in the average selling 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 peak 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% over the last 12 months compared to close to 30% at their peak. This is likely due to stubbornly high mortgage rates, which remain above 6%. Buying a home at that rate has become unaffordable for more Americans. To incentivize purchases, Lennar has had to drop the selling price on homes.

On top of this financing pressure, Lennar is being affected by the current negative net migration to the United States. The fewer people coming to the country looking for housing, the less demand there is for certain types of housing, all else being equal.

While this may create short-term uncertainty, Lennar's leadership position in housing should remain steady for the next decade. As of this writing, the stock trades at a price-to-earnings (P/E) ratio of just 12 on depressed earnings. Once mortgage rates, housing activity, and immigration headwinds subside, Lennar's earnings should begin to grow again, making it a cheap contrarian stock for investors to buy right now.

Like Lennar, D.R. Horton is a homebuilder negatively affected 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 land-optioning business model rather than outright land purchases before building. Its gross margin has fallen from over 30% to 23.3% over the last 12 months due to a falling ASP and a simultaneous rise in inflation.

The quintessential dividend growth formula

If we look at both D.R. Horton's and Lennar's financials, they are primed to deliver value to shareholders who can see the forest through the trees. Both stocks are generating positive free cash flow despite this rocky homebuilding environment, though their different business models lead to different financial performance. D.R. Horton's capital-light land option model has generated $3.5 billion in free cash flow over the last 12 months, while Lennar's is down to $309 million due to its upfront investments. However, Lennar is transitioning to a land-option model to improve cash conversion.

Long term, both stocks have consistently generated positive cash flow for shareholders, enabling them to return capital and increase dividend payouts.

Through share repurchases, both companies are deploying a model of perfect dividend growth. As a company repurchases stock from existing shareholders, its shares outstanding decline, enabling it to support a higher dividend per share with the same nominal dividend commitments. In the last five years alone, both Lennar and D.R. Horton's outstanding shares have fallen by close to 20%.

It is this consistently declining share count that has helped both of these stocks become magnificent dividend growers. Lennar's dividend per share is up 1,220% in the last 10 years, while D.R. Horton's is up 462%. As companies continue to repurchase stock at these discounted prices, management can continually raise its dividend payout to shareholders.

Once the housing market normalizes in the coming years, Lennar and D.R. Horton should see a strong recovery in earnings, making them great buys on that basis as well. These are fantastic dividend stocks that any investor will be happy to hold in their portfolio over the next decade.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends D.R. Horton and Lennar. The Motley Fool has a disclosure policy.