The Motley Fool

This 7.7% yielder isn’t the only dividend stock I’d buy with £2,000 today

Today I want to take a look at two companies from the same sector that are offering very different opportunities for investors.

The sector is housing and my first company is FTSE 100 housebuilder Persimmon (LSE: PSN). This York-based firm’s forecast yield of 7.7% is one of the highest on the market. And unlike some very high yields, this payout is supported by earnings and covered by net cash, which rose to £1.3bn last year.

No sign of weakness

Persimmon’s very high yield seems to reflect investors’ concerns that current profits might not be sustainable. Weakness in the London property market suggests that a wider slump could follow, but so far we’ve not seen much evidence of this. Housebuilders in particular have reported continued strong demand for new-build homes.

For 2017, Persimmon reported a 5.7% increase in legal completions and a 3.2% increase in average selling price, which rose to £213,321. Revenue for the year rose by 9% to £3.42bn, while the group’s underlying operating profit rose by 24% to £966.1m.

Can it last?

Looking ahead, the company said that forward sales rose by 7.5% to £2.03bn last year. At the end of February, the private sales rate per site was said to be 7% higher than at the same time in 2017.

If the UK economy remains stable, I believe Persimmon could deliver several more years of 7%+ dividend yields. For investors wanting a high-yield income stock, I’d continue to rate these shares as a buy.

What about capital gains?

Persimmon shares now trade at a hefty 2.5 times their net asset value. If you’re looking for capital gains rather than income, I believe it might make sense to look for a situation where a company is priced at a discount to its net asset value.

One possible choice is AIM-listed housebuilder Inland Homes (LSE: INL). Shares in this £125m firm currently trade at about 60p. According to today’s half-year results, this is significantly less than the expected value of the firm’s development assets.

Trading at a discount

Today’s figures show that Inland’s net asset value increased by 13.6% to £134.7m during the six months to 31 December. That’s around 67p per share, slightly above the current share price.

However, this valuation is based on the cost price of the group’s property. It doesn’t include expected gains from future development. When this unrealised value is included, Inland’s after-tax net asset value rises to 87.54p per share.

At the current share price of 60p, this means that its stock is available at a discount of about 31% to its expected future value.

Why I’d buy

Today’s figures show that the firm’s pre-tax profit rose by 8.4% to £5.37m for the six months to 31 December. The interim dividend has been increased by 30% to 0.65p per share, reflecting stronger cash generation.

Inland currently has more than 700 homes under construction, with an expected value of about £187m. This is equivalent to nearly two years’ revenue, which should provide good visibility of earnings.

The shares look cheap to me on several measures. The discount-to-book value sits alongside a forecast price/earnings ratio just 8.7 and a prospective yield of 2.7%. I think this stock could be a profitable buy at this level.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. There are no strings attached, simply click here for your free copy.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Inland Homes. 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.