A once-in-a-decade opportunity to buy one of the best FTSE 100 dividend stocks?

Dr James Fox explains why now could represent a rare opportunity to buy a beaten-down FTSE 100 stock that historically offers excellent yields.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 is littered with beaten-down stocks. The economic environment hasn’t been conducive to the bull run we’d all been hoping for. But these conditions are also ideal for value hunters.

In such an environment, I look to channel my inner Warren Buffett — the king of value investing. He tells us that bad news is an investor’s best friend, and that we should be greedy when others are fearful.

So, if we want to invest like the incredibly successful Buffett, maybe now is the time to be active.

Buying bad news

The ‘Oracle of Omaha’ tells us that we sometimes need to overlook bad news and focus on fundamentals.

So, with that in mind, I’m looking at one sector that’s been hammered by bad news over the last year — housebuilding. The news hasn’t been getting any better in recent weeks with interest rates continuing to rise. Forecasts now suggest a Bank of England interest rate of 5.4% by the end of the year.

Obviously these rate rises are designed to reduce the flow of money within the economy. In theory, this leads to less demand for mortgages and fewer buyers, and eventually falling house prices. Crippling mortgage repayments could also force more property onto the market.

Meanwhile, construction material prices rose by 11% last year. Clearly, this isn’t a great combo.

So, what does this mean for share prices? Well, we can see that Persimmon (LSE:PSN), for example, is trading near a 10-year low. Others are clearly depressed, but not to the same levels.

A buying opportunity?

Falling share prices don’t mean cheap stocks. Some stocks are cheap for a reason. As Buffett tells us, it’s about fundamentals and we have to do our research.

Focusing on Persimmon, the stock offered a huge 18% dividend yield in 2022. But it was unsustainable and the cut (now 5%) was made towards the end of the year. The company had also claimed to have one of the lowest exposures to the fire safety pledge. However, this turned out to be incorrect and Persimmon has quadrupled its cost forecast.

More recently, UBS upgraded Persimmon to ‘neutral’ from ‘sell’. The FTSE 100 homebuilder is buying cheap land again, as it did in the previous downturn, and is aiming for the top end of guidance.

While this is positive, it means Persimmon could be more exposed to negative pressure due to market positioning — it was a particular beneficiary from the now-closed Help to Buy scheme. UBS reiterated a ‘buy’ rating on a host of other housebuilders, meaning it sees better value elsewhere.

So, no. I’m passing on this opportunity to buy Persimmon stock.

A better alternative

Vistry Group (LSE:VTY) might not be trading at 10-year lows, but it’s not far off. The FTSE 250 company is exposed to the same concerns within the private market — although sales have picked up since the disastrous Truss premiership.

I’ve been buying Vistry shares, and its 7.8% yield, rather than Persimmon. And that’s because Vistry offers more safety in the form of its sizeable affordable housing division.

Earlier in the year, the firm said its affordable housing and rental sector work has partly cushioned it from the wider property slowdown. This could continue to work in its favour as interest rates increase and as private sales, potentially, fall.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Vistry Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young black colleagues high-fiving each other at work
Investing Articles

2 FTSE 100 value stocks I’d buy for my Stocks and Shares ISA in March!

Now could be a great time for fans of FTSE 100 value stocks to go investing. Here are a couple…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Looking for value stocks? Here’s 1 I’d buy and 1 I’d avoid!

This Fool delves deeper into two value stocks she’s had her eye on and explains why she’s bullish on one,…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

With the Airtel Africa share price in pennies, is it a bargain?

With the Airtel Africa share price having slumped by a quarter in just one month, this shareholder considers some of…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

Are these 2 defensive FTSE 100 stocks shrewd buys after recent updates?

This Fool takes a closer look at these FTSE 100 stocks. She admires their defensive traits -- but does that…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The FTSE 100 closes up after full-year results from leading UK firms – are they buys?

Earnings season brings about a lot of ups and downs for the FTSE 100. Yesterday had some particularly good releases,…

Read more »

artificial intelligence investing algorithms
Investing Articles

Should I buy NVIDIA stock as a British investor?

NVIDIA stock is up two-thirds this year alone. Our writer considers some pros and cons, specifically given that he is…

Read more »

Investing Articles

With £2,000 in excess savings, I’d buy 41 shares in this Warren Buffett dividend stock

Stephen Wright thinks one of the best dividend shares to buy right now might be a Warren Buffett stock that’s…

Read more »

Investing Articles

How many Aviva shares do I need to collect a £100 monthly income?

Aviva shares are well suited for passive income purposes. Our writer works out how many would be needed for a…

Read more »