Investors should be cautious when considering FTSE 100 shares with high dividend yields. A pumped-up yield is sometimes a sign of a stock in serious trouble. You don’t want to lose a chunk of cash chasing a fanciful passive income, or a company whose share price is collapsing.
Yet Persimmon‘s (LSE:PSN) a share with a big yield worthy of serious consideration. Trading conditions are worse than they’ve been for years, causing the housebuilder to tumble in value. But has the market become far too pessimistic? I think so.
For transparency, I hold Persimmon’s shares in my Stocks and Shares ISA. Over five years it’s slumped 63% in value, leaving me with a nasty paper loss. But here’s the thing: over time, I’m expecting it to rebound. And in the meantime, investors can possibly lock in a mouth-watering dividend income.
How so?
Out of the FTSE 100’s big-hitting income shares, Persimmon’s been something of a mixed bag of late. Annual payouts were cut in 2023, to 60p per share in response to higher interest rates and slowing home sales. They’ve remained at that level since, leaving investors’ income vulnerable to inflation.
Yet on the plus side, this — combined with a sharp share price drop — still means those buying Persimmon shares have snared sky-high yields around and above 6%. To put this in context, the FTSE average has been much closer to 3%.
What makes Persimmon such a special share today is its dividends are tipped to start growing again, to:
- 62.23p per share in 2026.
- 66.46p next year.
- 69.48p in 2028.
Consequently, dividend yields range from 5.6% to an enormous 6.3% for the period.
Cash and cover
The question is, of course, how robust are these forecasts? And especially as stress grows in the UK housing market? Latest Zoopla data shows buyer demand down 15% year-on-year due to “the combination of political uncertainty and higher borrowing costs”.
Persimmon’s share price could fall further if this persists. But I’m confident it won’t impact the company’s dividends. Dividend cover ranges 1.6 and 1.7 for the next two years, below the ideal security benchmark of 2. Yet that cover is far from terrible, and besides, the housebuilder has a strong balance sheet it can utilise for near-term dividends.
Also, it has no debt and — as of last December — healthy net cash of £117m.
Is Persimmon a FTSE 100 share worth buying?
Importantly, Persimmon has so far avoided the broader housing market slowdown too, or at least that’s according to latest financials.
It said on 30 April that it had started the year well… with an improved private sales rate and an increase in average selling prices. “As a result, our private forward sales are up 7% on the prior year“, it added.
This is no accident, reflecting Persimmon’s focus on affordable homes. And this should support healthy earnings in the current part of the cycle.
Hargreaves Lansdown also notes that its homes “are typically priced around 19% below the newbuild national average, [meaning] sales tend to be more resilient in times of uncertainty“.
Though there’s risk, I think Persimmon should remain one of the FTSE 100’s best-paying dividend shares. And I expect its share price could rebound when market conditions improve.
It’s not the only passive income hero that’s caught my eye though…
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Royston Wild owns shares in Persimmon.
