Persimmon (LSE:PSN) is a FTSE 100 stock paying a massive 20% dividend yield. As an investor seeking passive income, Persimmon is definitely attractive on face value. It has the largest dividend yield on the index by some margin. However, really big yields can be a warning sign.
A good time to buy dividend stocks
Personally, I see now as a good time to buy dividend-paying stocks in general. That’s because UK stocks have pushed downwards in recent weeks. And when share prices go down, dividend yields — the percentage of a company’s share price that it pays out in dividends each year — go up.
Persimmon was already the biggest dividend-paying stock on the index, but the stock has fallen as the year has gone on. The firm’s performance is not the reason for this falling share price however. In fact, Persimmon has performed rather well, with higher realised house prices pushing up revenue.
Persimmon missed its H1 targets after completions fell, but kept its targets for the year. H1 performance was boosted by selling prices. The average selling price for a new home built by the company rose by £9,400 year on year, to almost £246,000 during the half. Meanwhile, private sales were 8% higher than pre-pandemic levels.
Another warning
Persimmon is currently trading with a price-to-earnings ratio (P/E) of just 4.5. That’s very cheap. In fact, it’s so cheap that it’s probably a warning sign. It means investors don’t believe Persimmon will be able to sustain its current level of profitability.
The low P/E ratio reflects that profits have been sizeable over the past year, but the share price has been falling. The Persimmon share price is actually down 55% over the past 12 months.
And there are several reasons for this. Interest rates are rising, and may even get as high as 6% next year as the Bank of England attempts to bring inflation under control. In turn, this is likely to make potential buyers postpone their purchasing decisions.
In turn, house prices are expected to flatline while cost inflation is running near 5%. Collectively, these factors will likely squeeze margins over the next year.
Would I buy Persimmon stock?
Despite the above challenges, I think Persimmon stock has fallen far enough. The share price hasn’t been this low for eight years. And there are also several reasons why I would buy more of this stock.
Firstly, there’s an acute shortage of housing in the UK and therefore, I’m confident that in the long run, demand will pick up. There’s also the matter of the fire safety pledge. While some housebuilders are losing a year’s worth of profits to recladding houses, Persimmon’s outlay is only equivalent to 10% of 2021 income.
And at this moment, the dividend forecast for 2023 is 225p, down only 10p from 2022. Having said that, if the yield was halved, it would still be larger than the index average.
So, despite the challenges, I actually see the current share price as good entry point and I’d buy more Persimmon stock today.
The post Should I buy a FTSE 100 stock with a 20% dividend yield? appeared first on The Motley Fool UK.
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James Fox has positions in Persimmon. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
