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2 UK shares with an average dividend yield of 12.5%! Should I buy?

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There has been plenty of volatility for UK shares in recent weeks as investors digest data from around the world. These two UK stocks have seen their share prices fall over the last year, but have still performed pretty well.

As a result, the dividend yields have been greatly inflated. But it’s often worth being wary of big dividend yields. So let’s take a closer look at these companies and see whether they’re right for my portfolio.

Persimmon

Persimmon (LSE:PSN) has the largest dividend yield on the FTSE 100, currently standing at a huge 16.5%. The housebuilder was previously offering a pretty sizeable dividend yield but this has increased considerably as the share price has pushed downwards.

The stock is down a whopping 48% over the past 12 months, and that’s despite housebuilders registering records profits over that period. Persimmon missed its H1 targets after completions fell, but kept its targets for the year.

The average selling price for a new home built by the company rose by £9,400 year-on-year, to almost £246,000 during the half. Private sales were 8% higher compared to pre-pandemic levels, despite being 7% over the year.

However, there’s certainly a lot of negativity surrounding housebuilders right now with interest rates rising and a cost-of-living crisis. But it’s worth noting that Persimmon is trading at its lowest point in five years — even lower than at the beginning of the pandemic.

And that’s why I’m bullish on this firm right now. Yes, there are some short-term issues, and falling demand for houses will likely pushes prices down and cut margins. And that 16.5% dividend yield does seem unsustainable. But even halved to 8% would still be double the index average.

In the long term, I’m confident demand for housing will bounce back, and so will the Persimmon share price. I already own this stock but would buy more at the current price.

Legal & General (LSE:LGEN) shares are down less than Persimmon — 7% over the year. And this has served to inflate the dividend yield, which currently sits at 9.11%.

The falling share price belies a pretty positive performance. Legal & General recently announced that interim operating profits had risen 8% in the six months to the end of June.

And despite the negative economic environment, there are signs the business could continue its strong performance way into 2023. For one, life insurers often do well when interest rates rise as it means they have to set aside less capital now to make future payments.

And, importantly, as highlighted by Bank of America, the sizeable Legal & General dividend looks secure. Last year, the dividend coverage ratio — a metric that indicates how many times a company can pay its dividend from net income — was 1.85. That’s pretty healthy, although a figure closer to 2.0 would be stronger.

Recessions will likely reduce demand for its financial services products as finances get squeezed. But in the longer run, Legal & General is a household name with a solid business model that should continue to succeed. And this is why I’ve already bought Legal & General for my own portfolio. Again, I’d also buy more with any spare cash I have.

The post 2 UK shares with an average dividend yield of 12.5%! Should I buy? appeared first on The Motley Fool UK.

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James Fox has positions in Persimmon and Legal & General. 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.