With inflation reaching its highest level in four decades, the appeal of high-yielding shares is particularly strong for me right now. One FTSE 100 share is currently yielding 11.3%. The company is Persimmon (LSE: PSN). Its share price has fallen 31% over the past year, pushing up its yield to double digits as a consequence.
That dividend certainly sounds attractive to me. But is it too good to be true?
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An unusual dividend model
Persimmon stands out from most listed companies, due to the way it approaches dividends. Most companies that pay dividends do so each year without distinguishing where the money has come from.
They may pay at separate times, for example as an interim dividend and later on a final one. But usually companies do not spend much or any time discussing where the money for a particular dividend has come from. For example, from business, in line with a plan, or extra profits from outperformance. One exception is when a business makes a large sale and pays a special dividend with the proceeds.
Persimmon is different. It seeks to pay out what it calls a “regular annual instalment” at a set amount, which currently stands at £1.25 per share. But it also aims to pay a dividend as a way to return “surplus capital” based on business performance. A £1.10 dividend per share to that end is scheduled for July.
No dividend is ever guaranteed, so the regular annual instalment may turn out to be irregular. It was not paid for the 2019 financial year, for example, though in the end an additional payment was made instead.
But I think the Persimmon approach is still an interesting one. If business slows down, for example, because a recession leads to lower demand for new homes. In that case, the surplus capital may dry up. But, hopefully, Persimmon shareholders might still get the regular dividend. At the current share price, that alone would lead to a juicy 6% yield.
Persimmon is unusual in that it barely covers its dividend payments from earnings. Some investors see that as lacking caution. But, looked at another way, I like the fact the business is focussed on returning almost its excess cash to shareholders.
My move on the Persimmon share price
The falling Persimmon share price suggests growing concerns that economic problems might hurt both revenues and profits for the housebuilder. That could turn out to be the case. For now though, things look good. Last month, the company said trading was in line with expectations and demand remains strong.
As it pointed out, the UK’s housing shortage means the “longer-term fundamentals are strong” in the market for new housing.
I find Persimmon’s 11.3% yield attractive. Even if a slowdown does lead to a partial dividend cut, I think the yield could still be 6%, above the FTSE 100 average.
If business gets very bad, like any, Persimmon may suspend its dividend altogether. But, for now at least, the company’s confident tone suggests buoyant customer demand. I am considering buying Persimmon for my portfolio.