There are some seriously big dividend payers in the market’s top tier right now. Offering close to 9% for the current year, York-based housebuilder Persimmon (LSE: PSN) is clearly one of them. So long as this cash is reinvested back into the market, that’s the sort of return that theoretically should put investors well on the road to achieving millionaire status over the long term.
Given that sky-high dividends can often be a precursor to troubled times, however, is this sort of yield too good to be true?
Today’s trading update, released ahead of interim results next month, suggests that investors shouldn’t begin worrying just yet.
At £1.84bn, total revenues were 5% higher in the first half of 2018 than over the same period in the previous year. Housing revenues rose by the same percentage (to £1.74bn) with the number of legal completions climbing 3.6% to 8,072 homes by the end of June.
The outlook looks equally rosy. Total forward sales hit £1.68bn by the end of the reporting period and enquiry levels were 6% higher than in 2017, giving substance to the company’s belief that consumer confidence “remains resilient“.
The fact that Persimmon plans to expand its existing sales network of 370 outlets by another 100 over H2 is another sign of confidence on the part of management. Forty five new sites (on which 11,000 new homes are expected to be built) were also acquired over H1, bringing the total amount spent on land this year to £343m.
Despite this outlay, Persimmon’s finances continue to look solid with £1.15bn of cash before the most recent dividend payment at the beginning of July.
Beware the cycle
Given that a significant proportion of the returns made by investors over the long term can be attributed to the reinvestment of dividends and the beauty of compounding, buying a basket of high-quality, high-yielding stocks makes a lot of sense. The fact that Persimmon’s shares still look reasonably priced on 9 times forecast earnings (others in the sector trade on similar valuations) only adds to its appeal.
Just like any investment, however, owning shares in a housebuilder isn’t without risk. While its board “remain confident” in the company’s future prospects, the cyclical nature of the housing market simply can’t be ignored. Indeed, the fact that Persimmon’s valuation has slipped 14% in less than a month would suggest that a minority of investors are beginning to question just how long the good times can last. Regardless of today’s headline numbers, news that CEO Jeffrey Fairburn gets paid the equivalent of 3,195 times that of the firm’s lowest-paid employee is also unlikely to sit well with some.
Clearly, a sustained rise in interest rates could upset the apple cart. Such a situation would likely cause the housing market to cool, hitting profits of companies such as Persimmon (although perhaps less so than peer Berkeley Group which is less geographically diversified and focused on wealthier purchasers). The end to the Help to Buy scheme — currently scheduled for 2021 — could also prove problematic given that first-time buyers are among its target customers.
In sum, while Persimmon could certainly put you on the path to building a million, I believe it should only ever be held within a fully-diversified portfolio that can be retained with confidence through all market conditions.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.