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Have I just made a terrible mistake in buying this FTSE dividend stock?

Young Asian woman with head in hands at her desk
Young Asian woman with head in hands at her desk

Last month I took what I knew was a big risk and bought the dividend stock with the highest yield on the entire FTSE 100.

It was paying 19.47% at the time, which is an insane sum. Every warning sign was flashing, because I know full well that a high yield suggests a company in trouble. Yet I still dived in and snapped up shares in housebuilder Persimmon (LSE: PSN).

My reasoning was that the stock was cheap, having fallen roughly by half over the previous 12 months (with a similar drop over five years). Persimmon was valued at less than five times earnings, and looked stunning value to me despite current worries.

This dividend stock had an amazing yield

I accepted that the dividend may be vulnerable, but decided its sheer scale left plenty of leeway. Even if management slashed the payout in half, I would still be getting income of 10% a year.

Also, Persimmon has a reputation for rewarding shareholders handsomely. I told myself that management would be reluctant to trash this unless it had no choice. Also, I reasoned that a dividend cut would do little damage to the share price, given how cheap the stock already was.

All those arguments turned to dust on Tuesday, when management delivered a miserable trading update. Cancellation rates jumped and sales fell after mortgage rates surged in the wake of former Chancellor Kwasi Kwarteng’s mini-Budget fiasco. The share price fell 7% on the day.

Even where buyers held firm, reservation prices fell 2%. With a growing army of analysts predicting a property market crash of 10% to 15%, a much bigger drop looks baked in

Persimmon is making fewer land purchases as it looks to “navigate the uncertain outlook for the UK housing market”. As if all that wasn’t enough, it also had to increase Grenfell provisions for unsafe cladding to £350m.

Buying FTSE 100 shares is a long game

Today, we learned that GDP fell by 0.2% in the quarter to September. Chancellor Jeremy Hunt’s autumn statement will pile on the misery, bringing spending cuts and tax hikes. It’s a dismal picture and it looked like I had chosen a really daft time to invest in the UK property market.

I braced myself for the worst when I checked my portfolio prior to writing this. So imagine my surprise (and relief) when I discovered I was actually up 20% on my purchase.

Buying cheap worked in my favour. After Tuesday’s dip, Persimmon’s shares quickly recovered, because investors decided they were still good value. Everyone knows the property market is vulnerable, so the poor update was hardly a surprise. Once the details had sunk in, things didn’t look so bad.

So am I celebrating my 20% increase? Not really. While it’s nice to know I haven’t made a complete howler, I’m looking to hold this stock for two decades, rather than two weeks. Over such a timescale, short-term swings are neither here nor there.

So what would I have done if my shares in Persimmon had crashed? Bought more, probably. They’d be even cheaper.

The post Have I just made a terrible mistake in buying this FTSE dividend stock? appeared first on The Motley Fool UK.

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Harvey Jones 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 2022