Income investors are always on the prowl for high-dividend-yield stocks, and the FTSE 100 is home to many of them. With the stock market having a bit of a tantrum in 2022, plenty of once-thriving shares have come crashing down, pushing yields up.
As a result, double-digit dividend yields seem to be everywhere today. And in the case of the homebuilder Persimmon (LSE:PSN), its shares are now offering a whopping 15.6% payout!
Is this too good to be true? Or should I be steering clear of this investment entirely? The answer is a bit complicated so let’s take a closer look at what’s going on.
Why is Persimmon’s dividend yield so high?
Over the last 12 months, the Persimmons share price has plummeted by over 45%. This caused the dividend yield to reach its current impressive level. Yet looking at the latest interim results may have some investors scratching their heads.
After all, the company reaffirmed full-year home completion guidance, gross margins are up slightly despite inflationary pressures, and the average new home selling price reached £245,597 versus £236,199 a year ago.
At the same time, the group’s forward sales position stands at an impressive £2.32bn, signalling no immediate issue in finding new customers. And while home completions have slowed in the last six months, management expects volume delivery to be “significantly higher in the second half of the year”.
These facts certainly make this FTSE 100 stock’s 15.6% dividend yield look attractive. But there may be a problem bubbling under the surface. And if investor fears are right, Persimmon might be a giant trap.
Cracks in the foundation
As I previously mentioned, gross margins on property sales have improved slightly over the last six months. And they now stand at a respectable 31%. However, these improvements don’t stem from more efficient construction efforts but rather an increase in property values.
So the question circling my mind now is, what if house prices start to fall. With rising interest rates paired with the end of the Help To Buy government support scheme later this year, many analysts are expecting a contraction in the UK property market.
Goldman Sachs predicts growth will stall, while Savills estimate a 1% drop in house prices next year. And that means the offsetting factors benefiting Persimmon today might soon disappear.
Overall, it seems the group is at the mercy of factors beyond its control. If house prices drop, margins will more than likely suffer, compromising earnings and, in turn, dividends. In other words, the stock’s whopping 15.6% dividend yield may be very short-lived. On the other hand, if the housing market manages to beat expectations, investors could be looking at a rare massive income opportunity.
All things considered, with little to no control over what’s going to happen in the coming months, I’m not interested in taking this risk for my portfolio.
The post 15.6% dividend yield! Is this FTSE 100 stock too good to be true? appeared first on The Motley Fool UK.
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Zaven Boyrazian 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.