Ever so often, the market throws up a bargain that is just too difficult to pass up. Today I’m looking at one of these opportunities, a blue-chip FTSE 100 stock with a 9% dividend yield.
Homebuilder Persimmon (LSE: PSN) is well known for rewarding shareholders with chunky dividend payouts. Since 2013, the company has returned a staggering 720p per share to investors, that’s 29% of its current share price.
And the company isn’t planning to disrupt this track record any time soon. Management is looking to return another 580p per share to investors by mid-2021, taking the total cash return from 2013 to 1,300p per share.
Starting from these figures, shares in Persimmon should yield 9.6% in 2019, and the same amount in 2020 based on today’s share price.
What attracts me to Persimmon over other dividend stocks is management’s dividend roadmap for the next few years. The group initially committed to returning £1.9bn or 620p per share of surplus capital to shareholders between 2012-2021, and so far, not only has the company made good on this promise, but it has also surpassed expectations.
The question is, could there be a risk that, having increased its long-term cash return target, will Persimmon be forced to back-pedal if the housing market turns against it?
Is the payout sustainable?
I believe the chances of this are low. Persimmon is well capitalised and the company is riding high on the booming UK housing market. True, some cracks are starting to show at the upper end of the property market, particularly around London. But Persimmon’s core business of producing relatively affordable homes, below the average selling price of £242,000, is holding up well, supported by the government’s Help to Buy scheme.
What’s more, Persimmon’s forward sales pipeline (£2.1bn at the end of the first half of 2018) gives management plenty of clarity on how the business is going to perform over the next few years.
Coupled with the group’s near-£1bn net cash balance, this gives me confidence that the housebuilder won’t be forced to go back on plans to return capital over the next two years. In fact, I believe the company could increase its capital return target once again, although not everyone agrees with this view.
If you already own Persimmon, another builder that might be worth your consideration is Inland Homes (LSE: INL).
Inland does not quite have the same dividend record as Persimmon, but the firm is working flat out to improve its presence in the UK property market.
Last month, the enterprise announced that it is diversifying into the private rented sector and had submitted its largest ever planning application at a 30-acre site in Cheshunt. Today, the business has issued further good news, announcing that it has registered as a provider of social housing, following a two-year qualification period.
All of these changes are part of the company’s efforts to diversify its revenue streams, becoming an affordable housing champion in the South of England.
With affordable housing high on the agenda for the government, Inland’s focus on this section of the market is notable. Trading at only 7.8 times forward earnings, I believe this is an exciting play on the most robust segment of the UK housing market.
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Rupert Hargreaves owns no share 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.