Investors seeking high-yield dividend stocks need to be especially careful right now. Recent market volatility has pushed the yields on many FTSE 100 stocks through the roof. This makes many high-risk shares look extremely tempting.
However, the tough economic landscape means many of these companies could deliver disappointing dividends this year, and possibly beyond. With this in mind here, are two FTSE-listed stocks I’m avoiding.
Signs of mounting stress in the housing market mean I’ll continue avoiding Persimmon (LSE:PSN) shares in October. Latest financials showed pre-tax profits here are down 66% between January and June as completions slumped.
Don’t get me wrong. I believe the long-term outlook for builders like this remains extremely robust, driven by the country’s growing homes shortage. But until current turbulence in the housing sector passes, I believe dividend income at these companies could severely disappoint.
According to Halifax, the number of first-time buyers sank 22% between January and August. Demand from this key demographic could keep reversing too amid higher-than-normal interest rates and Britain’s deteriorating economy.
Persimmon has said it intends to pay another 60p per share dividend in 2023, matching last year’s reward. But weak dividend cover of 1.4 times and a rapid decline in balance sheet cash puts this admirable goal in severe jeopardy.
The firm’s 5.5% dividend yield is very attractive. But I’d still rather buy other shares for passive income.
Commercial property landlord Land Securities (LSE:LAND) offers an even larger dividend yield than Persimmon. For this financial year (to March 2024) it sits at an enormous 6.6%.
This huge yield is thanks in part to its classification as a real estate investment trust (REIT). This means the business has to pay a minimum of 90% of annual rental earnings out in the form of dividends.
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Providers of office and retail space like this were hollowed out during Covid-19 lockdowns. But as life has returned to more normal levels, trading conditions have steadily improved. Landsec said on Wednesday that occupancy at its Central London property portfolio was up 100 basis points between April and August, at 96.9%.
However, there are huge question marks over how far the FTSE firm can continue to rebound. Not only does the slowing UK economy pose a huge threat to the company. The growth of e-commerce and rising popularity of flexible working could cause profits to steadily decline.
Land Securities’ decision to boost its position in urban generation and mixed-use properties is a step in the right direction. But the risks associated with the rest of its business remain too high, in my opinion.
And like Persimmon, I also believe the property stock could disappoint income investors in the near term. This financial year’s predicted dividend is covered just 1.3 times by expected earnings. Landsec also has huge net debts (£3.3bn as of March) that cast a doubt over future dividends.
There are many other high-yield shares I’d rather buy for my portfolio.