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Profit investors are always on the lookout for stocks with high dividend yields, and FTSE 100 is home to many of them. As the stock market went into a bit of a frenzy in 2022, many once-booming stocks collapsed, pushing up yields.
As a result, double-digit dividend yields are everywhere today. So it is with the home builder Persimmon (LSE:PSN), its stock now offers a whopping 15.6% payout!
Is it too good to be true? Or should I abandon this investment altogether? 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 past 12 months, Persimmons’ share price has fallen by more than 45%. This has led to dividend yields reaching their current impressive levels. Still looking at the last one intermediate results may leave some investors scratching their heads.
After all, the company confirmed guidance for house completions for the full year, gross margins rose slightly despite inflationary pressures and the average sale price of a new home reached £245,597, up from £236,199 a year ago.
Meanwhile, the group’s forward sales are an impressive £2.32bn, suggesting there are no immediate problems in finding new customers. And while home completions have slowed over the past six months, management expects supply to be “significantly higher in the second half.”
These facts certainly make this FTSE 100 stock’s 15.6% dividend yield attractive. But there may be a problem bubbling under the surface. And if investors’ fears are correct, Persimmon could become a giant trap.
Cracks in the foundation
As I mentioned earlier, the gross margin on property sales has improved slightly over the past six months. And now they make up a respectable 31%. However, these improvements are not due to more efficient construction efforts, but rather to increased property values.
So now the question running through my mind is what if house prices start to fall. With rising interest rates coupled with the end of the Help To Buy government support program at the end of this year, many analysts expect the UK property market to shrink.
Goldman Sachs predicts that growth will stop for now Savills housing prices are expected to fall by 1% next year. And this means that the compensating factors that benefit persimmons today may soon disappear.
In general, it appears that the group is under the sway of factors beyond its control. If property prices decline, margins will likely suffer, which will hurt profits and in turn dividends. In other words, the stock’s whopping 15.6% dividend yield may not last very long. On the other hand, if the housing market manages to beat expectations, investors could get a rare opportunity for massive profits.
All things considered, with little to no control over what happens in the coming months, I’m not interested in taking that much risk on my portfolio.