2 high-yield FTSE 100 shares I’d avoid in October!

Fair warning! I believe these high-yield UK shares could deliver underwhelming dividends in the short term.

| 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.

Young Black woman looking concerned while in front of her laptop

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

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.

Persimmon

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.

Land Securities

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.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

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.

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 Persimmon Plc. The Motley Fool UK has recommended Land Securities Group 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.

More on Investing Articles

Young female analyst working at her desk in the office
Investing Articles

Here’s how I’d target a £23k second income with £300 a month

If I was building a shares portfolio today, here's how I'd go about it. With these strategies I stand a…

Read more »

Investing Articles

Tesla stock, MicroStrategy: here’s what Hargreaves Lansdown investors bought last week

MicroStrategy and Tesla stock were among the most popular investments last week as Donald Trump boosted markets with his election…

Read more »

Investing Articles

1 AI stock worth considering now Stocks and Shares ISAs are safe!

The Budget brought good news for those of us with Stocks and Shares ISAs! I’ve been looking at this one…

Read more »

Engineer Project Manager Talks With Scientist working on Computer
Growth Shares

Up 41% in 1 year, I’m buying more of this growth trust for my Stocks and Shares ISA

A great performance over the last 12 months has pushed our writer to buy more of a very exciting investment…

Read more »

Investing Articles

3 reasons to like the Legal & General dividend

Christopher Ruane explains a trio of reasons why he likes the Legal & General dividend as a source of passive…

Read more »

Investing Articles

Down 16%+, here’s 2 unloved FTSE 100 shares for savvy investors to consider!

These FTSE 100 shares have slumped in the past six months. Royston Wild thinks long-term investors should pay them close…

Read more »

Girl buying groceries in the supermarket with her father.
Investing Articles

Down 15%, but the FTSE 100’s J Sainsbury has a dividend yield over 5%!

Is it time to consider shares in FTSE 100 supermarket chain J Sainsbury for a potentially enduring stream of chunky…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
US Stock

Should I buy Palantir stock for my ISA after a 200% gain?

Edward Sheldon has cash to deploy within his ISA. Should he buy Palantir shares for more exposure to the artificial…

Read more »