Housebuilders like Persimmon (LSE: PSN) have been popular dividend stocks for a very long time.
The UK’s worsening homes shortage has driven property prices through the roof in the 21st century. This has delivered mighty profits and cash flow growth at the likes of Persimmon. This has, in turn, resulted in big rewards for shareholders by way of big dividends and share buybacks.
Today, Persimmon continues to offer some of the biggest dividend yields on the Footsie, at 10.4%. So should I add Persimmon to my shares portfolio today? Or is this FTSE 100 dividend stock a dangerous dividend trap?
The case for
There are several solid reasons why I should buy Persimmon shares right now. These include:
- House prices continue to soar. The prices Persimmon is asking for its product have kept surging as housing shortages have worsened. Indeed, Rightmove says that average UK asking prices have risen more than £55,551 in the past two years. That’s up from the £6,218 increase in the two years before Covid-19.
- Margins remain rock-solid. I like Persimmon in particular because of its market-leading margins. Product, labour and freight costs are all rising but the company’s margins have so far remained “resilient”, it said this month.
- A strong balance sheet. Persimmon has excellent liquidity to pursue its growth plans while continuing to pay big dividends. It had a healthy £446m worth of cash on the balance sheet as of late April.
- Terrific all-round value. Persimmon doesn’t just offer enormous dividend yields at current prices of £22.35 per share. The business also trades on a rock-bottom forward P/E ratio of 8.8 times.
The case against
Persimmon clearly has lots of appeal for FTSE 100 investors like me. However there are several big obstacles it may have to overcome to remain a top dividend stock.
For example, a blend of rising interest rates and the cost of living crisis poses danger to future homes demand. As homebuyer affordability comes under increasing strain, demand for newbuild properties could fall sharply later in 2022.
I’m also concerned by reports that government support for first-time buyers is about to be withdrawn. Over the weekend, The Telegraph reported that Help to Buy is set to be closed for new applicants five months early in October.
The verdict
It’s clear the outlook for the UK housing market is becoming foggier. These doubts have led to the likes of Persimmon falling sharply in value. The FTSE 100 housebuilder is now 22% cheaper than it was at the start of the 2022.
This sort of correction suggests a housing market collapse could be around the corner. However, I don’t think a crash is on the horizon. A steady stream of positive trading updates and industry reports from the likes of Zoopla continue to illustrate the robustness of the market.
I feel that Persimmon can remain a lucrative dividend stock to own for years to come. So I think recent share price weakness provides an excellent dip-buying opportunity for my portfolio.
