The FTSE 100’s average yield of 4.1% as of the end of March is nothing to sneer at. But for investors who are seeking truly impressive income, one option is large-cap homebuilder Persimmon (LSE: PSN) and its 8.7% dividend yield.
Normally a yield this high would set warning bells ringing. But Persimmon is in rude health as sky-high demand from buyers — and a conscious decision by homebuilders not over-build as they have in past boom times — has kept prices for their products very high indeed.
The positive effects of this (for homebuilders at least) were evident in the group’s trading last year as rising prices and selling a slightly larger number of homes led to revenue rising 9% to £3,140m, while underlying earnings per share rocketing 26% to 258.6p. This increase in earnings comfortably covered the 125p interim and 110p final payouts while the group’s highly-cash-generative operations and net cash position of £1,303m at year-end provides plenty of firepower to reward shareholders, buy more land and build more homes.
This stellar trading has continued over into the new year as the group’s AGM trading update disclosed enquiries from interested customers are 13% ahead of the same period last year, suggesting continued robust demand. Forward sales revenue has inched up 8% year-on-year and average selling price per home has risen as well. All great news for investors.
Now, potential investors should remember that investing in Persimmon, as with all homebuilders, is essentially a bet on the health of the domestic economy. When a recession hits, big ticket items like new homes are the last thing most consumers will be buying.
With well over a billion pounds of cash on hand, very high margins from in-house production of building materials, and a sustainable portfolio of plots under construction, Persimmon should survive the next downturn just fine, even if its share price will likely take a beating. But for investors who are bullish on the domestic economy, Persimmon could be a bargain pickup at 11 times earnings with an 8%+ dividend.
A rare combination of growth and income
Another cyclical stock that’s growing by leaps and bounds and returning loads of cash to shareholders is the maker of promotional products 4imprint (LSE: FOUR). The company has grown rapidly in recent years by taking market share in the highly fragmented US market for company-branded pens, bags and other products.
Last year, group sales rose by 12% to $627.52m, while pre-tax profits increased 11% to $42.46m. Rising earnings, alongside $30.8m in cash in the bank at period-end, led management to propose an ordinary dividend of 42.58p and a special payout of 43.17p. Together, that leaves the company’s stock yielding 5.03%.
But while this level of income is certainly welcome, the story for 4imprint will still be growth-focussed in the years ahead. Management is targeting $1bn in sales by 2022. And this looks very achievable given its breakneck growth in recent years and the opportunities for organic growth presented by the fragmented, highly-localised branded goods market in the US, of which 4imprint estimates its share in the low single-digits.
This combination of growth and income doesn’t come cheap as 4imprint’s shares trade at 20 times forward earnings. But long-term investors may find the stock’s recent pullback an interesting time to begin a position.
