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I’m finding FTSE 100 dividend hero Persimmon’s amazing 12.7% yield impossible to resist

Housebuilders are tricky for investors. Many have been scared away by Brexit fears and concerns about what will happen when the Help to Buy scheme is trimmed back in 2021. Yet it’s hard to resist a sector crammed with stocks offering double-digit yields at bargain valuations.

Cultural revolt

FTSE 100 housebuilder Persimmon (LSE: PSN) has lost a quarter of its value in the past six months, but it was up 1.61% this morning despite lots of negative numbers in its half-year results to 30 June. Profit before tax fell 1.3% to £509.3m year-on-year, while the group sold 7,584 new homes, down from 8,072 prior. Total group revenue was 4.5% lower at £1.75bn. For once, though, investors looked beyond the bottom line.

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Persimmon is in the process of implementing cultural change, with its new priority “improving the quality and service delivered to our customers” something sorely needed after criticisms of the quality of its work. This includes a pioneering retention scheme, which gives buyers of its new-builds the right to hold back 1.5% of its total purchase value to allow for snagging issues.

Fewer snags

Sometimes you have to go backwards to go forwards and this should also make investors feel better about pocketing the stonking forecast yield of 12.7%, covered 1.2 times by earnings. That may look unsustainable, but group CEO Dave Jenkinson has reminded investors Persimmon maintains a strong balance sheet, with cash reserves of £832.8m, while net free cash generation was £182.4m (albeit down from £240.4m a year ago). Rupert Hargreaves reckons that sky-high yield is here to stay

Yet the £6bn group trades at just 6.8 times forward earnings. Maybe I’m being naive here, but that yield will double your money in six years and you might even get share-price growth on top when the housebuilding sector recovers.

Taking flight

If you fancy more bargain FTSE 100 dividend stock picks, don’t overlook Phoenix Group Holdings (LSE: PHNX). The £4.85bn group currently offers a whopping forecast dividend yield of 7%, covered 1.3 times by earnings, another juicy income stream in our era of falling global interest rates. The Phoenix share price is up almost 20% year-to-date, against 6.5% for the index as a whole. Yet you can still buy it at a bargain valuation of just 11.4 times forecast earnings.

Phoenix is easy to overlook because, unlike other major insurers, it goes about its business quietly. It’s a closed life assurance fund consolidator, buying up the life and pension books from better-known rivals and seeing them through to completion. It boasts 5.6m policyholders and £74bn of assets, making it the UK’s largest consolidator.

Solid consolidator

It sounds like a solid business to be in, and this should make Phoenix less volatile than insurers with asset management arms that expose them to wider stock market volatility. It looks like a good portfolio underpinning and the dividend is strong. The group expects to hit the upper end of its full-year 2019 cash generation target range of £600m-£700m, and the board recently lifted the interim payout 3.5% to 23.4p.

With group operating profit climbing 50% to £325m, the risk-to-reward ratio is one of the most tempting on the index. Not quite as tempting as Persimmon, though.

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Harvey Jones 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.