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There are some very high dividend yield is currently available on the UK stock market. A variety of stocks even offer double-digit annual percentage income. But I like some more than others as possible additions to my portfolio. Lately I’ve been looking at a few income stocks that yield 12% and 16% respectively. But I like one more than the other. I’ll explain why below.
High yielding dividend stocks
Before revealing the identity of the companies, I will describe some of their characteristics.
One buys up old gas wells in the US and sells the energy from them. With high energy prices, this could be a very profitable business model. The company has been actively buying up thousands of such wells that are no longer economic or strategic for major producers, but still have gas in them. This could turn out to be a deal-making genius.
It pays its dividend quarterly and has a track record of raising it over the past few years. But one risk I see in addition to unpredictable energy prices is the potential cost of decommissioning tens of thousands of aging wells as they reach the end of their useful lives.
Another company operates on this side of the Atlantic. Builds and sells houses. The company’s business model means it usually has an attractive rate of return. Last year, for example, its net profit after tax was about 22%. This year, average sales prices have increased, but in the first half of the year sales volumes have decreased compared to the same period last year. The key risk I see is a loss of momentum in the UK housing market, which could hurt both sales and profits.
Who is who
Both companies clearly face risks that could lead to future dividend cuts. What they have in common is that profits can suffer due to the cyclical risk of falling prices, both for energy and housing.
Even so, of the two stocks I would like to buy persimmons for my portfolio. why?
Weighing the risks and benefits
In short, both stocks carry significant risks. But I think the risk/reward ratio looks better in Persimmon than in Diversified.
Persimmon has proven its business model over the decades. Home building as an industry has long roots, although when demand falls, it also causes quite a few business bankruptcies. Diversified is a relatively new company and its business model is innovative. This means that it can be surprisingly profitable – but there is also the risk that it is not sustainable, for example if the wells have to be shut in.
Despite its large dividend, Diversified has posted accounting losses over the past couple of years. By contrast, Persimmon’s after-tax profits topped three quarters of a billion pounds last year.
Often, a much higher return can indicate increased risk. Although Persimmon’s yield is higher, I’m more comfortable with its risk profile, which fits my personal investment goals, than Diversified’s. So of the two stocks, the one I would consider for my portfolio today is Persimmon.