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I bought this FTSE 100 share for fat dividends. Big mistake!

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So far, 2022 has not been great for global investors. In late 2021, I repeatedly warned that US stocks were expensive and priced to fall. Since 31 December 2021, the US S&P 500 index is down 16.6%, having fallen much further. But realising that UK stocks were dirt-cheap, my wife and I bought several cheap FTSE 100 shares.

FTSE 100 shares dodge the storm

As a value investor, I love buying cheap and overlooked stocks. For me, the best place to find these is in the FTSE 100. Thus, from late June to late July, my wife and I bought six FTSE 100 shares (and three FTSE 250 stocks) that we viewed as too cheap.

By and large, we are happy with our new value shares. That said, one stock stands out as a disastrously timed purchase. Seduced by its mouth-watering 12.1% dividend yield back then, I urged my wife to buy into one FTSE 100 share. How I wish that I’d kept quiet.

This FTSE 100 share crashed

In the interest of Foolish honesty and transparency, here’s what I (and not my wife) got wrong. Also, I’ll admit that our disastrous decision to buy shares in leading British housebuilder Persimmon (LSE: PSN) was entirely my fault.

Indeed, my wife asked why should she buy into a property business when I was forecasting a 2023 housing crash? I replied that this stock offered the highest cash yield among FTSE 100 shares. Alas, I was about to be humbled.

We bought Persimmon shares in late July at an all-in price (including dealing charges and stamp duty) of 1,855.9p a share. They then crashed brutally, plunging to a 52-week low of 1,113.5p by 12 October. At this point, we’d racked up a paper loss of two-fifths (-40%) of our initial investment in 3½ months. D’oh.

On the rebound?

Fortunately, Persimmon shares have recovered a bit. Currently, they trade at 1,268p, down 31.7% on our buy price — and down by more than half (-53.2%) in 12 months. At the current share price, this FTSE 100 firm is valued at under £4.1bn. This is more than three-fifths (-61.3%) below its all-time peak capitalisation, hit in pre-Covid February 2020.

Right now, Persimmon stock looks incredibly cheap, based on fundamentals. It trades on a price-to-earnings ratio of 5.52, equating to an earnings yield of 18.1%. Also, its trailing dividend yield of 18.5% is the highest among FTSE 100 shares.

Now for the bad news

I repeat: I was drawn to buy this FTSE 100 share by its whopping cash yield. But this double-digit dividend yield is doomed in 2023. Persimmon is already reporting falling home sales and future reservations, lower sale prices, and higher cancellations.

To me, this indicates that Persimmon’s yearly cash dividend of 225p per share is history. Indeed, the firm recently suspended its previous payout policy and forecasts. Hence, I expect this payment to tumble in 2023, perhaps to mid-single digits going forward.

My biggest lesson from this blunder is not to be bewitched by double-digit dividend yields. In future, my goal is solid and reliable dividends, not sky-high cash yields. Then again, we will not sell this FTSE 100 share for now. After a tough 2023, I have high hopes for Persimmon’s recovery, so we will stick with it!

The post I bought this FTSE 100 share for fat dividends. Big mistake! appeared first on The Motley Fool UK.

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Cliffdarcy has an economic interest in Persimmon shares. 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.