When I bought Persimmon (LSE: PSN) shares last October, I knew I was taking a chance. At the time they yielded almost 20%, and yields that size rarely last.
I bought the FTSE 100 housebuilder anyway, deciding its dividend was so generous that even if it was cut in half, it would still pay me a decent level of income. I also reasoned that the market knew the dividend was doomed, and the impact on the share price would be relatively minor.
I’m happy I bought this stock
So it proved. At the start of last month, management warned of lower profits and margins and cut its dividend by 75%. The share price dipped, but only slightly. My shares are up 7.5% since I bought them, despite today’s 2.5% dip.
That’s neither here nor there, of course. I measure success or failure over years and decades, rather than weeks. Still, I’m glad I didn’t overpay.
The Persimmon share price is down a brutal 41.74% over 12 months, and the reasons are pretty obvious. Last year’s inflation and interest rate spike threatens to trigger a UK house price crash, by driving up mortgage costs.
The cost-of-living crisis is making buyers feel poorer and more cautious, while some will be holding back hoping to get on the property ladder for less at some later date. This week’s news that inflation was still in double digits in March came as a further blow.
Mortgage rates have fallen below 4% in recent weeks, but markets now expect the Bank of England to hike base rates to 4.5% in May, and possibly 5% by the end of the year. I’ve even seen predictions of 6%, which if sustained would drive up borrowing costs to frightening levels.
Buying shares in Persimmon today is risky but many of the challenges are priced into today’s rock bottom valuation of just 5.1 times earnings. The dividend yield is currently 4.7%, covered a meaty 4.1 times by earnings. Despite the cut, it’s still above today’s FTSE 100 average yield of around 3.5%.
Still a decent dividend
To generate income of £100 a month from this stock alone, I would have to invest £24,500, which is more than this year’s Stocks and Shares ISA allowance.
Next year’s forecast yield is 6.1% (with cover of 1.4). Assuming that plays out, next year I could get £100 in monthly income by investing £19,672 in Persimmon.
Either way, that’s too much for me to invest in just one stock. Especially in a relatively high-risk sector like housebuilding. I would happily invest £5,000 in Persimmon shares, which would give me income of £235 this year.
I’m not going to do that, though. I would rather buy another house building stock, for two reasons. The first is diversification. I already hold Persimmon. The second is that I think FTSE 100 rival Taylor Wimpey looks like a better bet.
It’s also cheap, trading at 6.5 times earnings while yielding 7.6%, covered twice by earnings. Taylor Wimpey also has risks, and no dividend is ever guaranteed, but I’ll be looking for a chance to grab that income at a bargain price in the months ahead.
