In the world of low interest rates that we’ve been in for the past year, hunting for yield has become more important to me. Some FTSE 100 dividend stocks can offer me a higher yield than I would get via alternative income paying investments. As the impact of the pandemic eases, I’ve started to see more companies reinstating dividends, or increasing the size of the dividend.
Whichever stock I choose to buy, I’m keen to put it in my ISA before the April deadline. This is because I’ll lose any of my allowance that I haven’t used up when the new ISA year starts. Holding the FTSE 100 dividend stock in the ISA allows me to collect the dividends gross, without having to pay tax on them.
Strong results from a FTSE 100 stock
One stock that I’d look to buy right now is Persimmon (LSE:PSN). The UK-based homebuilder currently offers me an attractive 7.98% dividend yield. This means for a £1,000 investment, I’d be picking up just shy of £80 a year in passive income.
Persimmon is in a position to offer a generous dividend yield for a few reasons. The primary one is that it has plenty of free cash to distribute. Full-year results showed that cash increased from £843.9m in 2019 to £1,234.1m in 2020.
This was helped in part by the large profit margins that Persimmon has. Gross profit margin stood at 31%, and even the operating profit margin was high at 27.6%. Ultimately, the higher the profit margin, the larger the profit. The larger the profit, the higher the cash generated that can be distributed to shareholders.
Safe as houses?
I think that the outlook for the FTSE 100 stock is positive, supporting the paying of dividends going forward. The average selling price was up 6.9% in 2020, to over £230,000. If house prices remain stable and continue to tick higher, this will support the business. I’m also conscious of the continued boost that the stamp duty holiday will have.
A major spanner that could be thrown into the works would be any kind of re-introduction of lockdown later this year. Persimmon incurred £8m in costs to ensure a Covid-secure working environment last year. Even with construction being an industry that has been able to operate more than others during the pandemic, higher costs are a risk. If these costs increase, and access to raw materials and transportation is hindered, housing projects could be delayed. In turn, this may decrease free cash flow, with a small possibility of reducing the dividend yield. The eventual end of government schemes to help house-buyers could also hurt the firm one day.
I’m personally ok with the above risk. The success of the vaccination programme so far leads me to conclude that this lockdown will be our last in the UK. Also, £8m in costs sounds a lot, but when you consider the profit before tax of £863m, it’s definitely manageable.
Overall, I think this FTSE 100 dividend stock allows me to have a home for my money that will generate sustainable passive income. The dividend yield is attractive, and one that I think is relatively safe going forward. On this basis I’d look to buy Persimmon shares for my ISA.
