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A FTSE 100 share with a 7% yield to buy now

·3-min read
FTSE 100 (London Stock Exchange Share Index) on Gold Coin Stacks Isolated on White

FTSE 100 housebuilder Persimmon (LSE: PSN) said recently that sales this year are 23% ahead of 2020 levels, and 11% ahead of the same point in 2019. This share also offers a 7.6% dividend yield and has net cash of £850m on its balance sheet.

Persimmon’s share price has risen by 36% over the last year, but I think this popular income stock remains an attractive buy.

Is the housing market about to crash?

Housebuilders have performed well over the last decade, thanks to cheap mortgages and government measures, such as Help to Buy.

Many people (including me) thought the pandemic might trigger a housing slump but, so far, this hasn’t happened. The government’s Stamp Duty holiday helped to encourage people to start moving again. It seems there’s still plenty of demand for new homes.

Even so, I think there’s still a risk the housing market could slow this year. The Stamp Duty holiday ends this month and Help to Buy has already been scaled back. Since April, this loan scheme has only been available to first-time buyers.

It’s too soon to know how these changes will affect demand for new homes. However, one point in Persimmon’s favour is that its homes are aimed at the mainstream market, not at luxury buyers. The firm’s average selling price of £252,000 is almost an exact match for the UK average house price of £242,832 (according to Nationwide).

Why does this FTSE 100 share yield 7.7%?

Most housebuilders have cut their dividends over the last year or so. Persimmon hasn’t. The company has resumed shareholder payouts at pre-pandemic levels, giving a forecast yield of 7.6% for 2021. It’s the highest-yielding UK housebuilder.

The reason for this is that unlike most of its rivals, Persimmon plans to pay out virtually all of its earnings as dividends. This would normally ring an alarm bells with me. For most businesses, it’s not sustainable.

However, years of high profitability have left Persimmon with a big net cash position and continuing strong cash generation. My analysis suggests that if the company can maintain its profits at current levels, the current payout may well be sustainable.

Will the Persimmon share price rise?

Persimmon is currently one of eight FTSE 100 shares with a dividend yield of 7%, or more. That yield is more than double the FTSE 100 average of 3%, so there’s clearly something unusual here.

In my view, I think the market is pricing Persimmon to suggest its dividend may not rise much further. I think that’s probably true. The company is already paying out almost all of its profits as dividends. Profit growth is expected to slow over the next couple of years, so I don’t expect Persimmon’s dividend, or its share price, to rise very quickly from now on.

Despite this, I’m still comfortable buying Persimmon shares. With a starting dividend yield of 7.6%, I don’t need much share price growth to achieve my target of a 10% annual return on my investment.

I think this FTSE 100 share should continue to deliver big dividends for the foreseeable future. I’m happy to sit back and continue collecting the income.

The post A FTSE 100 share with a 7% yield to buy now appeared first on The Motley Fool UK.

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Roland Head owns shares of 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.

Motley Fool UK 2021

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