I have been trying to build more passive income streams by investing in my Stocks and Shares ISA. Owning dividend shares can hopefully help me get regular money flows I do not need to work for.
At the moment, I can earn a 12% dividend yield from a couple of shares. But are they the right choice for my ISA?
Persimmon (LSE: PSN) is a well-known housebuilder and member of the FTSE 100 share index. Despite that, its stock currently looks unloved. The share price has crumbled 37% in a year and it now yields 12.7%.
That is an unusually high yield. Often when a dividend has a high yield it is a sign of elevated risk. Is that the case at Persimmon?
I think it could be. After all, the economy is slowing and that might push the housing market downwards. Lower selling prices could lead to both revenues and profits falling at housebuilders such as Persimmon. If that happens, the dividend could be on the chopping board.
But, for now at least, demand for housing seems to be robust. Persimmon has been around for decades and navigated its way through the housing cycle quite a few times. If the housing market falls steeply again it may indeed cut its dividend.
Yet given today’s high yield, if it cuts rather than completely cancels the dividend, it may still provide a juicy payout. I see Persimmon’s long experience in the housing market as a strong asset that could help it in years to come. For that reason, I would consider buying this high yielder for my Stocks and Shares ISA.
Another firm yielding a similar amount – 12.4% — is gas provider Diversified Energy (LSE: DEC). Although listed in London, the company’s tens of thousands of wells are in the US. Its unusual strategy consists of buying wells nearing the end of their productive life, then squeezing more years out of them.
If it can buy the wells cheaply but sell the gas at market prices, that could be a lucrative model. Indeed, at the moment the company is riding the wave of a booming energy market and paying juicy dividends.
I think the model is interesting – and the double-digit percentage yield certainly catches my attention. But I also see some risks. An obvious one is the next fall in energy prices. If selling prices tumble, that will likely hurt both revenues and profits at Diversified.
I also fear that the clean up cost of wells could turn out to be a big liability. Diversified has increased its focus on that and even acquired a company that specialises in taking wells out of service. But I am still concerned that such wells could prove more costly to wind down than the company expects. For that reason, I do not now plan to add the company to my Stocks and Shares ISA
Risks and rewards in my Stocks and Shares ISA
It may be no coincidence that both these double digit yielders are in cyclical industries, with the risk of dividend cuts that brings. There is no guarantee that the current 12% yield will be sustained for either.
But I have a diversified portfolio and I would consider Persimmon as a possible addition to it.