This reading beats the FTSE 100 average of 3.8% by a huge distance. And while the dividend is expected to fall next year, Persimmon’s yield still sits at an impressive 10.6%.
I already own the housebuilder’s shares in my portfolio. Should I buy more?
First, let’s look at the robustness of current dividend forecasts. City analysts expect the full-year reward to fall from 235p per share in recent years to 205p in 2022. And dividends are tipped to drop again next year (to 141p).
Sure, these estimates create those vast yields. The trouble is that they aren’t very well covered by anticipated earnings. Dividend coverage sits at 1.2 times for the next two years.
Ideally, dividend coverage should sit at 2 times or above. This gives a wide margin of safety in case earnings fall short of expectations.
The trouble for Persimmon is that the housing market is slowing rapidly. It’s why City analysts now expect yearly earnings to slip 2% this year before tanking 32% in 2023.
Latest trading news last week made for scary reading. Then the company said weekly sales rates and forward sales had both dropped due to “increased interest rates and reduced mortgage availability” and “increasing cost of living pressures”.
This wasn’t the only area of concern for me. As an income investor, I was alarmed by signs that the business could be clamping down on paying big dividends.
Persimmon announced plans to scrap its capital allocation policy introduced a decade ago. From now on it said “ordinary dividends will be set at a level that is well covered by post-tax profits”. It also said there will be no special dividends for 2022.
A gloomy outlook
This is a wise approach to take in the current landscape. But it means the passive income I receive from the company could fall short of what I was expecting when I invested in June.
Market conditions have deteriorated significantly since then following the disastrous mini-budget of late September. Rising home loan costs and mortgage product withdrawals by lenders are hammering demand across the housing market.
Estate agent Savills has said house prices could fall as much as 10% in 2023. At the same time, housebuilder margins are likely to remain under attack from high construction costs. Inflation at Persimmon ranged a whopping 8-10% from 1 July to 7 November.
I’m buying other dividend stocks
I’m not beating myself up for buying Persimmon shares. I couldn’t have foreseen the mortgage market meltdown that followed the mini-budget. But I don’t plan on buying more shares in the business any time soon.
Yes, I buy shares with a long-term view in mind. And over the next decade I expect house prices to rise strongly. But I also buy dividend shares for passive income that I then reinvest in my portfolio.
The uncertainty over Persimmon’s new dividend policy — and the prospect of a sharp housing market slowdown — means the business has lost a lot of its appeal to me. Therefore, I’m buying other high-dividend shares right now.
The post 15.6% dividend yield! Should I buy Persimmon shares for passive income? appeared first on The Motley Fool UK.
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Royston Wild has positions in Persimmon. 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.