I’m searching for the best FTSE 100 dividend shares to buy for my portfolio before this week’s Stocks and Shares ISA deadline. And Persimmon’s (LSE:PSN) dividend yields have once again caught my eye.
Based on current dividend forecasts, the housebuilder carries a 6.2% dividend yield for 2023. This is far ahead of the 3.8% average for FTSE 100 stocks.
Things get even better for 2024, too. Next year, the annual yield steps to 7.8%.
Yet I’m torn over whether to add to my existing holdings in Persimmon. Is this income stock too risky?
Weak dividend coverage
First let’s drill down into those short-term dividend estimates and consider how realistic they are.
Persimmon slashed shareholder payouts in 2022 as home sales collapsed and the threat of a long downturn emerged. The full-year dividend dropped to 60p per share from 235p a year earlier.
But City analysts are expecting dividends to start rising again from this year. Full-year payments of 77.3p and 97.3p per share are anticipated for 2023 and 2024 respectively.
Unfortunately, however, these predictions aren’t well covered by earnings. Coverage ranges between just 1.2 times and 1.4 times through the next two years. This is well below the benchmark of two times that provides a wide margin of safety.
… but balance sheet strength
In better news, Persimmon has one of the strongest balance sheets in the business. Therefore, if earnings disappoint if could still have the financial strength to make the dividends that City analysts are anticipating.
Cash on its books dropped 30% in 2022 as market conditions worsened. Yet the business still had a whopping £861.6m worth of cash on the balance sheet as of 31 December.
It’s also worth mentioning that Persimmon’s dividend coverage has long lagged that safety target of two times. But the business still has an excellent record of paying above-average dividends. Poor cover then for the next two years may not be as alarming as it first looks.
Market uncertainty
Having said that, the UK housing market is facing its highest level of uncertainty since the 2007/08 financial crisis. In this landscape I’d be looking for better dividend coverage today.
Nationwide’s latest industry report showed average home prices slumped 3.1% in March. This was the biggest annual drop since summer 2009 as buyer interest remained weak.
Here’s what I’m doing now
I still believe that holding my existing Persimmon shares is a good idea. This is because I expect house prices to rise robustly on a long-term basis.
Britain’s population continues to steadily grow. Yet housebuilding activity is not being increased to meet rising demand. In fact, there were just 409,500 planning applications in 2022, a 14% year-on-year fall. In this landscape, I expect home prices to resume their strong march higher sooner rather than later.
This doesn’t mean I’ll buy more Persimmon shares for passive income, though. There’s still too much market uncertainty out there, which means that dividends could disappoint in the next couple of years.
For this reason I’d rather buy other cheap FTSE 100 shares for dividends today. There are certainly many top stocks for me to choose from following recent stock market volatility.
The post 7.8% dividend yield! Should I buy this cheap FTSE 100 income share? appeared first on The Motley Fool UK.
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Royston Wild has positions in Persimmon Plc. 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.
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