1 cheap FTSE 100 stock with 10%+ dividend yield!

This FTSE 100 stock is the best of both the worlds. It is both cheap and has a double-digit dividend yield. What’s not to like?

| 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.

Dividend yields are not terribly reliable measures these days. Recent stock market uncertainty has artificially pumped them up, like in the case of the FTSE 100 Russian miner Evraz. It had the biggest dividend yield among all the index’s constituent stocks even earlier, but now its price has plunged so much that its yield is at an explosive 100%+. Needless to say, it is still not attractive considering the risks attached to buying the stock. But not all stocks can be painted with the same brush. Like this FTSE 100 stock with a 10%+ dividend yield. 

Over-correction in the Persimmon share price

I am talking about the housebuilder Persimmon (LSE: PSN). In my book, it is an undervalued stock right now. Its share price has actually declined by 14% over the past year. Some of this was to be expected. The real estate market benefited significantly from government support during the pandemic. Most significantly, stamp duty relief led to a housing market rally, that supported housebuilders’ fortunes in otherwise challenging times. But as the stimulus was withdrawn, their share prices came off. 

I do believe, however, that the Persimmon share price has over-corrected. At present, it is trading 30% below its pre-pandemic highs, which suggests that it could rise far more from here. This is especially so considering the company’s recent results. For the full year 2021, the company saw an increase in both net profits and revenues from 2020. It has also managed to reverse the decline seen under both headings since 2019, which is particularly encouraging from a dividend perspective. As a shareholder, it is hard for me to see how it can sustain its dividends if its income falls. Now I am less concerned. 

Promising dividend yield

In its results released earlier today, the company reported it expects to maintain its dividends at the 2021 levels, at least so far. This puts both its current and forward yield at just north of 10%. Little wonder then, that its share price has jumped 4.3% this Wednesday afternoon. I do believe, though that it can rise much more. This is partly because, as I mentioned earlier, it is trading below pre-pandemic levels. But it is also because its market valuation looks subdued to me, with its price-to-earnings (P/E) ratio at around 9.5 times. This is much lower than the FTSE 100 P/E of 15 times. 

Would I buy the FTSE 100 stock?

Persimmon’s valuation is in line with other real estate stocks, which suggests to me that it may not be undervalued compared to peers. At the same time, at this uncertain time for stock markets, cyclicals like property stocks are expected to take a bit of a hit. If economic recovery does continue, however, Persimmon’s fortunes are likely to continue improving as far as I can see. Moreover, even keeping peer valuations in mind, the fact is that its P/E is lower than it was even a few months ago. I think it is a good time for me to increase my holdings in the stock. 

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.

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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

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 »