This 7.7% yielder isn’t the only dividend stock I’d buy with £2,000 today

Roland Head zooms in on two stocks that could be great ISA buys.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I want to take a look at two companies from the same sector that are offering very different opportunities for investors.

The sector is housing and my first company is FTSE 100 housebuilder Persimmon (LSE: PSN). This York-based firm’s forecast yield of 7.7% is one of the highest on the market. And unlike some very high yields, this payout is supported by earnings and covered by net cash, which rose to £1.3bn last year.

No sign of weakness

Persimmon’s very high yield seems to reflect investors’ concerns that current profits might not be sustainable. Weakness in the London property market suggests that a wider slump could follow, but so far we’ve not seen much evidence of this. Housebuilders in particular have reported continued strong demand for new-build homes.

For 2017, Persimmon reported a 5.7% increase in legal completions and a 3.2% increase in average selling price, which rose to £213,321. Revenue for the year rose by 9% to £3.42bn, while the group’s underlying operating profit rose by 24% to £966.1m.

Can it last?

Looking ahead, the company said that forward sales rose by 7.5% to £2.03bn last year. At the end of February, the private sales rate per site was said to be 7% higher than at the same time in 2017.

If the UK economy remains stable, I believe Persimmon could deliver several more years of 7%+ dividend yields. For investors wanting a high-yield income stock, I’d continue to rate these shares as a buy.

What about capital gains?

Persimmon shares now trade at a hefty 2.5 times their net asset value. If you’re looking for capital gains rather than income, I believe it might make sense to look for a situation where a company is priced at a discount to its net asset value.

One possible choice is AIM-listed housebuilder Inland Homes (LSE: INL). Shares in this £125m firm currently trade at about 60p. According to today’s half-year results, this is significantly less than the expected value of the firm’s development assets.

Trading at a discount

Today’s figures show that Inland’s net asset value increased by 13.6% to £134.7m during the six months to 31 December. That’s around 67p per share, slightly above the current share price.

However, this valuation is based on the cost price of the group’s property. It doesn’t include expected gains from future development. When this unrealised value is included, Inland’s after-tax net asset value rises to 87.54p per share.

At the current share price of 60p, this means that its stock is available at a discount of about 31% to its expected future value.

Why I’d buy

Today’s figures show that the firm’s pre-tax profit rose by 8.4% to £5.37m for the six months to 31 December. The interim dividend has been increased by 30% to 0.65p per share, reflecting stronger cash generation.

Inland currently has more than 700 homes under construction, with an expected value of about £187m. This is equivalent to nearly two years’ revenue, which should provide good visibility of earnings.

The shares look cheap to me on several measures. The discount-to-book value sits alongside a forecast price/earnings ratio just 8.7 and a prospective yield of 2.7%. I think this stock could be a profitable buy at this level.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Inland Homes. 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.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »