Housebuilder Persimmon (LSE:PSN) has punched some healthy share price gains in recent weeks. Yet at current prices of around £11.60, the FTSE 250 business still carries dividend yields well above the index average. This indicates it could be a good way to make a passive income.
At 5.1%, the builder’s yield for 2023 smashes the FTSE 250’s 3.7% forward average. For next year, it moves to an even-more impressive 5.2%.
Do these figures make the former FTSE 100 share too good to ignore? Or should I avoid Persimmon shares like the plague as the housing market weakens?
More poor data
Latest data from Rightmove on Monday underlines the problems facing UK housebuilding shows. It showed average home prices dropping 1.7% this month, representing the biggest November fall since 2018.
The property listings business said that “buyers are still out there, but for many their affordability is much reduced due to higher mortgage rates.”
That said, Rightmove’s latest research did contain some crumbs of comfort. It also showed that sales agreed are now 10% below 2019’s more normal market levels. That’s not ideal, but it’s better than October’s 15% decline.
Dividends in danger?
I believe the long-term outlook for Britain’s housebuilding sector remains robust. It’s why I continue to hold shares in Persimmon. But I have no intention of increasing my stake.
I’m hoping that, as economists increasingly expect, interest rates begin to trend lower from next year. This will give buyer affordability a big boost. But I’m concerned that home sales could remain in the doldrums as Britain’s economy looks on course for a prolonged struggle.
Today’s Rightmove data is especially worrying for me as a dividend-chasing Persimmon shareholder. Current profit projections for the business already cast a doubt over the level of shareholder payouts City analysts are tipping.
Predicted payouts for 2023 and 2024 are covered 1.4 times by expected earnings. A reminder that any reading below 2 times is classified as being in ‘the danger zone.’
Such erosion is also concerning given how rapidly cash reserves are declining. Cash dropped to £360m as of June from £780m a year earlier.
A muddy outlook
Admittedly, news coming from Persimmon itself hasn’t been all doom and gloom more recently. This month it hiked its full-year build target to 9,500 homes. That’s up from the minimum of 9,000 it was predicting as recently as August.
But data elsewhere made for grim reading. Completions were down 37% in the three months to September, at 1,439, while its order book also plummeted by more than a third year on year to £930m.
Persimmon also warned this month that market conditions “will remain highly uncertain” looking into 2024.
Housebuilders like this have strong track records of paying above-average dividends. But in the current climate, I believe buying them for passive income is a big gamble. For this reason I’d rather search the UK markets for other dividend shares to buy.