Inflation is ravaging cash in the bank, but I’d buy top FTSE 100 dividend stocks in a bid to stay one step ahead. The following two offer incredible double-digit yields. Both tempt me today but are there underlying problems I haven’t spotted?
Housebuilder Persimmon (LSE: PSN) is one of the most eye-catching FTSE 100 dividend stocks of all, currently yielding a staggering 11.17%. Its share price performance is rather less dazzling, though. The stock is down 30% over 12 months.
The housing sector is often seen as a play on consumer confidence, and war in Ukraine, the rising cost of living, and anticipated interest rate hikes have undermined the Persimmon share price. The cladding crisis has also hit performance. Persimmon even sought legal advice over government threats to stop housebuilders from trading if they don’t pay into a supposedly voluntary fire safety repair fund.
Persimmon is one of my fave FTSE 100 dividend stocks
Along with 36 other construction firms, it has now signed up to the £3bn Building Safety Levy, designed to fix problem blocks. Yesterday’s results showed demand remaining “strong”, with average sales rates up 2% year on year. It also boasts a “robust” £2.8bn forward order book. That’s why I still see Persimmon as one of the most tempting FTSE 100 dividend stocks today.
The Bank of England is likely to hike interest rates further but I’m not too worried about that. Mortgage rates are still historically low, lenders are hungry to lend, and buyer demand is high. Housing shortages are unlikely to ease soon. Prices are still rising. Persimmon doesn’t look overpriced to me, trading at 8.8 times earnings.
Dividend cover is thin compared to many FTSE 100 dividend stocks at just 1.1, but management is still committed to rewarding shareholders. It has just handed them an additional distribution of 110p per share, on top of the standard Q1 dividend. Next year’s forecast yield is around 11%. Margins look comfortable at 27.1%. The same is true of return on capital employed at 27.4%. I’d buy and hold for long-term dividend satisfaction. Maybe some share price growth, too.
Low share prices can boost yields
Anglo-Australian mining giant Rio Tinto (LSE: RIO) also tops most FTSE 100 dividend stocks by paying a thumping 11.7% yield. Dividend cover is more comforting here, at 1.7. The forecast yield is even higher, at 12.4%.
Again, a key reason is that the Rio Tinto share price has struggled lately. It is down around 12% measured over the last year. That is partly down to last week’s double-digit drop, as investors were spooked by lower-than-expected iron ore shipments in Q1. Management added to their fears by warning of inflationary risk, the impact of Chinese Covid lockdowns, and of course the threat of a lengthy war in Ukraine.
Labour shortages and supply chain issues are also causing problems, but I don’t choose FTSE 100 dividend stocks based on how well they are doing in the most recent quarter. I buy them for their long-term prospects over at least a decade or more. In fact, I think the recent dip is working in my favour, by making the stock cheaper. It currently trades at just 6.3 times forecast earnings. With operating margins of 48.9% on a return on capital employed of 35.9%, I’m a buyer.
