If 2021 was a good year for FTSE 100 dividend yields, 2022 is expected to be even better. From their current levels of 3.4%, they are expected to rise to 4.1% this year according to AJ Bell research. But what is true for the whole index might not be so for every single stock. That’s the case even for those that have impressive yields right now, like the housebuilder Persimmon (LSE: PSN), which has a yield of 9%.
Why I’m unsure of Persimmon’s dividend yield
Is the yield sustainable? I am not convinced it is, due to the outlook for the housing market. As we know well, the housing market got a temporary boost during the pandemic from supportive government policies. However, the fiscal bonanza was never expected to last, and it is now in the process of being withdrawn. Moreover, interest rates are also on the rise, which could slow down demand for housing loans. Rising inflation could also leave people feeling worse-off with more likely to postpone a house purchase.
The future of the housing market appears to be uncertain as a result. And there has even been speculation of a housing market crash. Of late though, the forecasts have started looking less dire. I have seen a number of reports that indicate that the market will cool down, but not crash. This is a more encouraging prediction, for sure. It is even more so when coupled with Persimmon’s own outlook.
Positive trading update for the FTSE 100 stock
The housebuilder recently released trading update ahead of final results for the year ending 31 December 2021. In that, it appeared positive with regards to 2022. It has a stronger forward sales position for the year than it did in 2019. The comparison would be odd at any other point in time, but it makes sense now. In 2020 and 2021, the housing market was artificially elevated to help it ride out of the pandemic. And 2019 is the last pre-pandemic reference point. Also, the company is positive on the longer-term fundamentals of the housing market.
What happens to its dividends?
However, when trying to assess whether or not it will be able to sustain it dividend yield, I do need to consider how it will perform in 2022 compared to last year as well. Here the news looks a bit disappointing. Its forward sales this year are slightly lower than that during 2020. So, I expect that some correction could happen, since this could reflect in its revenues and profits.
The yield could also decline because there is more upside to its share price, in my view. Its price-to-earnings (P/E) ratio is at a relatively muted 10.5 times. Even with all the support for the real estate sector, its share price never went back to its pre-pandemic highs. And in recent months, it has fallen a fair bit from even the levels that it touched during the pandemic.
What I’d do
In sum, I do not think that its 9% yield is sustainable in 2022. But I think it could still continue to pay decent dividends. And besides that, I believe its share price could also rise. That means on 2022, it may be a stock for both growth and dividend investors. I have bought the stock already for the long term, and I might buy more of it during the year.
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Manika Premsingh owns 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.