5.8% dividend yield! Should I buy Persimmon shares for passive income?

Housebuilder Persimmon offers one of the biggest forward dividend yields on the FTSE 100 today. So is it a stock for passive income investors to consider?

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Persimmon’s (LSE:PSN) share price remains on the back foot as worries over the UK housing market mount. But at current levels of £10.35, the business does — at face value — look like it could be a great buy for passive income.

Right now, the FTSE 100 company carries an enormous 5.8% dividend yield for 2023. This comfortably beats the forward average of 3.8% that UK blue-chip shares currently carry.

That said, investors can get higher yields on other British housebuilding shares. As the table below shows, Persimmon offers better yields that Vistry Group and Barratt Developments. But they fall short of what Taylor Wimpey and Redrow currently offer.

StockForward Dividend Yield
Taylor Wimpey8.2%
Barratt Developments4%
Vistry Group5.1%

So should I buy the builder’s shares to supercharge my share-based second income?

Dividends keep coming

Buying any of London’s listed housebuilders is a risk right now. Profits are coming under severe pressure as interest rates rise and the UK economy cools.

Completions are falling as a result, while build costs are still running at elevated levels, putting margins under considerable pressure.

This is already taking a toll on the dividends Persimmon shares are delivering. In 2022, the company cut the full-year payout to 60p per share from 235p in the previous two years.

Encouragingly however, the business remains committed to delivering dividends for its shareholders. In its half-year statement it declared an interim payment of 20p, and said it intended to match last year’s total dividend.

Under pressure

City analysts are expecting the FTSE firm to make good on this pledge. But there are several good reasons why current dividend forecasts look quite fragile.

Firstly, conditions in Britain’s housing market remain highly challenging. Persimmon entered the second half of 2023 with forward sales of £1.4bn, down 27% year on year. And private average selling prices in the forward order book were also up just 0.6%.

Since then demand for homes seems to have taken a significant turn for the worse. Nationwide and Halifax note that average property prices have slumped at their sharpest rate since the late 2000s in August.

Mortgage approvals also dropped to five-month lows in July, the Bank of England has said. Home loan demand is likely to remain weak too as interest rates keep rising, possibly well into 2024.

This is especially concerning given the level of dividend cover at Persimmon. This year’s predicted shareholder payout is covered just 1.4 times by expected earnings of 81p. Any reading below 2 times poses danger at the best of times, and especially in the current climate.

Meanwhile, the company’s cash reserves are dwindling as sales of its newbuilds dry up. Cash on the balance sheet more than halved to £360m as of June.

The verdict

Given all of the above, I think there are better stocks to buy for investors seeking near-term passive income.

I plan to hold onto my Persimmon shares. This is because I believe the long-term outlook for the UK housing sector remains pretty strong. But I won’t be buying more of them in the current economic climate.

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.

Royston Wild has positions in Barratt Developments Plc, Persimmon Plc, and Taylor Wimpey Plc. The Motley Fool UK has recommended Redrow Plc. 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.

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