The FTSE 100 average dividend yield has been creeping higher in recent months. It’s now above 3.5%, making several companies look attractive to income investors like me. Although simply buying the stock with the highest yield isn’t always the smartest play, some ultra-high yields can offer me good risk/reward characteristics. Here’s one FTSE 100 dividend stock that I think fits into this category.
Good performance despite the pandemic
The stock I’m talking about is Persimmon (LSE:PSN). The company is a UK-based homebuilder, one of several within the FTSE 100. The share price is down 5.6% over the past year.
The past couple of years have been a bit of a whirlwind for the business. The pandemic saw the company briefly stop the payment of dividends in order to retain cash flow. Fortunately, the housing sector was an area not overly hit by Covid-19. The construction industry was able to continue (with some precautionary measures) for most of 2020 and 2021.
Persimmon has also benefitted from a booming housing market, again partly driven by Covid-19. Government measures reducing stamp duty have buoyed house prices. The working from home culture has also seen more people look to upsize, or move out of larger cities. As a result, the average UK house price in September hit a record of £267k. This was the largest monthly rise since early 2007.
Buying the dip in this FTSE 100 dividend stock
As far as FTSE 100 dividend stocks go, the yield of 9.35% is high. One element that has pushed this yield higher is the fact that the share price has fallen 12% in the past month. The dividend yield calculation is based on the dividend per share and the share price. So if the share price falls, it boosts the overall yield.
Why has the share price fallen recently? I think some concern is that house prices are getting into a bubble. If this is true and the bubble pops, this would be a large negative for the share price. Personally, this is probably the largest risk I see for this FTSE 100 dividend stock in coming months.
However, buying when the share price has dipped is a good strategy for dividend stocks. After all, it allows me to take advantage of the yield offered.
With a longer-term view, I think the outlook is still positive for the company. The half-year results showed a strong forward order book. It had forward sales of £2.23bn, up 9% from the same time in 2019. Profit before tax for H1 jumped to £480.1m in comparison to £291.4m from H1 2020.
Therefore, even if we do see house prices stagnate (I don’t foresee a full crash), Persimmon should have enough momentum to continue growing. With growth should come continued dividend payments. I’m considering buying shares now to benefit from this.
