This 7.7% yielder isn’t the only dividend stock I’d buy with £2,000 today

Roland Head zooms in on two stocks that could be great ISA buys.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I want to take a look at two companies from the same sector that are offering very different opportunities for investors.

The sector is housing and my first company is FTSE 100 housebuilder Persimmon (LSE: PSN). This York-based firm’s forecast yield of 7.7% is one of the highest on the market. And unlike some very high yields, this payout is supported by earnings and covered by net cash, which rose to £1.3bn last year.

No sign of weakness

Persimmon’s very high yield seems to reflect investors’ concerns that current profits might not be sustainable. Weakness in the London property market suggests that a wider slump could follow, but so far we’ve not seen much evidence of this. Housebuilders in particular have reported continued strong demand for new-build homes.

For 2017, Persimmon reported a 5.7% increase in legal completions and a 3.2% increase in average selling price, which rose to £213,321. Revenue for the year rose by 9% to £3.42bn, while the group’s underlying operating profit rose by 24% to £966.1m.

Can it last?

Looking ahead, the company said that forward sales rose by 7.5% to £2.03bn last year. At the end of February, the private sales rate per site was said to be 7% higher than at the same time in 2017.

If the UK economy remains stable, I believe Persimmon could deliver several more years of 7%+ dividend yields. For investors wanting a high-yield income stock, I’d continue to rate these shares as a buy.

What about capital gains?

Persimmon shares now trade at a hefty 2.5 times their net asset value. If you’re looking for capital gains rather than income, I believe it might make sense to look for a situation where a company is priced at a discount to its net asset value.

One possible choice is AIM-listed housebuilder Inland Homes (LSE: INL). Shares in this £125m firm currently trade at about 60p. According to today’s half-year results, this is significantly less than the expected value of the firm’s development assets.

Trading at a discount

Today’s figures show that Inland’s net asset value increased by 13.6% to £134.7m during the six months to 31 December. That’s around 67p per share, slightly above the current share price.

However, this valuation is based on the cost price of the group’s property. It doesn’t include expected gains from future development. When this unrealised value is included, Inland’s after-tax net asset value rises to 87.54p per share.

At the current share price of 60p, this means that its stock is available at a discount of about 31% to its expected future value.

Why I’d buy

Today’s figures show that the firm’s pre-tax profit rose by 8.4% to £5.37m for the six months to 31 December. The interim dividend has been increased by 30% to 0.65p per share, reflecting stronger cash generation.

Inland currently has more than 700 homes under construction, with an expected value of about £187m. This is equivalent to nearly two years’ revenue, which should provide good visibility of earnings.

The shares look cheap to me on several measures. The discount-to-book value sits alongside a forecast price/earnings ratio just 8.7 and a prospective yield of 2.7%. I think this stock could be a profitable buy at this level.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Inland Homes. 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.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »