Have £1,000 to invest? This FTSE 100 income stock could yield more than 26%!

This FTSE 100 (INDEXFTSE:UKX) stock offers the highest dividend yield around. Can you afford not to invest?

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In my opinion, homebuilder Persimmon (LSE: PSN) is the best income stock in the FTSE 100. 

The reason why I believe this is simple, according to current City figures, the company’s dividend yield stands at 10%, and over the next few years, the firm has committed to returning 26% of its market value to investors.

Too good to be true? 

A return of value of 26% might appear too good to be true at first glance, but the company really is planning to hit this target by 2021. 

It all comes down to management’s dividend roadmap, which was first proposed in 2012. After recovering from the financial crisis, during 2012 Persimmon’s management announced that the group would be returning £1.9bn or 620p per share of surplus capital to shareholders between 2012-21, as a thank you to investors for sticking with the company. 

However, over the following years, profitability exceeded the most optimistic expectations, and as a result, management has hiked the surplus capital return target from the original 620p to 1,300p by 2021. 

So far, the company has already returned 720p per share to investors, that’s 32% of its current share price. Over the next few years, it is looking to distribute a further 580p per share, equivalent to 26% of the firm’s current market value.

And I believe this could be a conservative estimate. Even though Persimmon has paid out billions to investors over the past few years, it has still accumulated a cash balance of £1.2bn and profits are only expected to expand further between now and 2021. To give you some idea of just how much money the company has available for distribution, if it stopped operating tomorrow, there is enough cash on the balance sheet to return 375p per share to investors over the next three years. 

With this being the case, I believe Persimmon’s income potential may be higher than even the most optimistic forecasts suggest today.

Cheap income 

If you already own Persimmon, then another income champion with a double-digit prospective dividend yield is Bovis Homes (LSE: BVS). Like Persimmon, Bovis is profiting from the rising demand for property in the UK and the country’s undersupplied housing market. 

As demand for the firm’s new-build properties continues to grow, City analysts have pencilled in earnings per share growth of 37% for 2018, followed by an increase of 15% for 2019. Based on these numbers, the stock is trading at a forward P/E of just 10.4, which in my opinion seems to undervalue the growth on offer here.

On top of the stock’s attractive valuation, the shares also support a dividend yield of 10%. Even though the payout is only just covered by earnings per share, I am confident that the distribution is sustainable because, like its large peer, Bovis has a cash-rich balance sheet. 

At the end of 2017, the company reported a net cash balance of £145m, enough to cover the dividend payout for at least a year and a half if the business stopped operating overnight.

Looking at these numbers, I am confident that Bovis could be a fantastic purchase for any income portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. 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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