Right now, Persimmon (LSE:PSN) looks like one of the best FTSE 100 shares for me to buy for passive income.
The troubles in Britain’s housing market are well publicised as interest rates soar. Yet despite this pressure, City analysts still expect this blue-chip homebuilder to raise the annual dividend in 2023.
This means Persimmon’s forward dividend yield sits at a juicy 5.4%, well ahead of the 3.7% average for FTSE shares. Predictions of another yearly hike in 2024 drive the yield still higher to 6.2%.
As someone who’s chasing chunky dividend payments, those yields look too good to ignore. They suggest that £10,000 invested in the company today could make me passive income of £540 this year and £620 in 2024.
But how robust are current dividend forecasts? And should I consider adding more Persimmon shares to my portfolio?
Bright forecasts
Given the firm’s recent record investors need to take extra care with this particular UK share. Last year it slashed the dividend by 74% to 60p per share as it hunkered down for the current storm and took steps to save cash.
But encouraged by solid recent trading, City brokers expect dividends to rise tentatively in 2023, to 61.5p per share. Another hike to 69.9p per share is predicted for next year.
Perhaps analysts are right to predict an upturn in Persimmon’s dividends. Its latest update in April showed sales rates per week improved significantly to 0.62 in the first quarter, from 0.3 in the prior three months.
Red flags
I believe it’s too early to suggest that dividends are about to climb again though. First of all, predicted payouts here are barely covered by anticipated earnings. Even a slight deterioration in trading conditions could cause shareholder payouts to fall well short of what analysts expect.
Dividend coverage for 2023 and 2024 sits at 1.5 times, well down of the widely accepted safety benchmark of 2 times-plus. Continued difficulitues in the homes market mean Persimmon is unlikely to use its dwindling cash reserves to pay big dividends too.
Cash on the balance sheet slipped 18% year on year to £353m as of March.
The verdict
The truth is that soaring inflation presents a colossal threat to the profits and dividends at Persimmon. Today, the Bank of England raised its benchmark rate to 5% to curb runaway price rises. And following shocking consumer price inflation data this week some are predicting the benchmark to move above 6%.
In this climate, sales at housebuilders could fall sharply over the short-to-medium term. FTSE 100 builder Berkeley Group predicted this week its own sales “will be around 20% lower” in this financial year.
So I won’t buy more Persimmon shares in order to boost my passive income. However, I have no plans to sell my existing holdings.
I’m still confident the company can deliver excellent returns over the longer term, amid chronic undersupply in the homes market. Weak housebuilding rates suggest this problem is unlikely to go away any time soon.
