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Why I’d buy these 2 FTSE 100 dividend stars

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Although the recent interest rate rise may mean the interest on cash balances increases in the near term, the reality is that dividend shares could be the best means of beating inflation for most investors. Interest rates are unlikely to rise to anywhere close to the current level of inflation of 3%, which means that obtaining real income returns may not be possible from cash over the medium term.

With that in mind, here are two FTSE 100 stocks which offer above-inflation dividend yields at the present time. Furthermore, they appear to have highly sustainable dividend growth prospects, as well as wide margins of safety. This could mean that they are able to deliver high total returns in the long run.

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Upbeat performance

Reporting on Wednesday was housebuilder Persimmon (LSE: PSN). Its third quarter performance was generally positive and showed that demand for new homes remains robust. Although the UK’s economic outlook has become increasingly uncertain in recent months, the housing market is showing no sign of a slowdown. Mortgage approvals during the three-month period were up 8% versus the same period of the prior year.

The company remains upbeat about its future prospects. Its land bank is growing while also building up cash reserves. They should help it to guard against a potential downturn in the UK housing market, although sales figures are showing no sign of slowing down at present. In the third quarter of the year, the company’s sales rate per site was up 14% versus its 2015 level.

With a dividend yield of 4% via its Capital Return Plan, which is due to see 110p per share distributed to the company’s investors per year from 2018 to 2021, Persimmon appears to have income investing appeal. With a price-to-earnings (P/E) ratio of 11.5, it could deliver high total returns in the long run.

Growth potential

Also offering high dividend growth potential in the long run is sector peer Barratt Developments (LSE: BDEV). The company is forecast to grow its bottom line by 6% in the current financial year. Despite this, it trades on a price-to-earnings growth (PEG) ratio of 1.8. This suggests that it could offer a wide margin of safety, which could equate to a rising share price in the long run.

Barratt currently yields 6.7% from a dividend which is covered 1.5 times by profit. This indicates that its current level of payout is highly sustainable, and could even be increased at a faster pace than earnings without hurting its financial position.

Certainly, the housebuilding sector faces risks from Brexit. However, with interest rate rises set to be slow and steady and demand-side policies such as Help to Buy expected to increase demand, the prospects for the sector appear to be bright. With Barratt and Persimmon both offering high dividend yields which appear to be sustainable, now could be the right time to buy them for the long term.

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Peter Stephens owns shares in Persimmon and Barratt Developments. 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.

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