I hold Persimmon (LSE: PSN) shares for the dividends, which I expect to keep ahead of inflation. That’s probably just as well really, as the Persimmon share price has lost 25% over the past 12 months. But I don’t necessarily see that fall as bad news, not as a long-term investor.
No, I see it as an opportunity to purchase more. Buying in the dips brings two benefits when it comes to dividends shares. One is that by hopefully buying in cheap I’ll enjoy some share price recovery. But the main one is that I’ll get to lock in higher effective dividend yields. So what does the dividend look like?
In its latest full-year results, Persimmon declared an ordinary annual dividend of 125p per share. On top of that, shareholders will pocket an additional 110p as part of the company’s return of surplus capital.
Dividends beating inflation
On the current Persimmon share price, that’s an ordinary yield of 5.9% and a total yield of 11%. But how long the surplus capital return will continue is uncertain, with the company saying it is “subject to continuous review, in line with the group’s strategy“.
But while we have it for the year just ended (and, hopefully, a bit more for the current year), it helps us keep ahead of inflation. January inflation in the UK hit 5.5%, and rising prices on the back of the Russian war in Ukraine may well push it higher.
Even with that, Persimmon’s ordinary dividend is close to coping. And the special payments help take me way ahead of inflation in my dividend income this year.
Over the longer term, I see inflation falling again. And I reckon there’s a good chance Persimmon’s ordinary dividend will keep me ahead of it.
A strong 2021
Despite rising mortgage costs and the financial squeeze hitting the housing market, Persimmon saw its number of completions rise in 2021. From 13,575 in 2020, the 2021 count reached 14,551. Prices are holding up too, with an average selling price of £237,078 (from £230,534).
Underlying pre-tax profit for 2021 rose to £937m (from £863m). And the company ended the year holding cash of £1,247m (from £1,234m). I reckon that is good news for future dividend prospects.
So why does the Persimmon share price remain weak? Its forward sales position at the end of December had slipped a little, down to £2.21bn from the previous year’s £2.27bn. And the number of UK developments had also dropped from 300 to 290. That, I think, hints at the potential downside for a Persimmon investment over the next couple of years.
Persimmon share price pressure
Rising inflation will inevitably lead to rising interest rates. That’s going to increase mortgage costs, which in turn will put pressure on the housing market. The UK’s housebuilders have had a few strong years now, despite the pandemic. So I fear we could be seeing the current Persimmon share price weakness turning into something of a cyclical downturn.
Still, I’m investing with a 10-year horizon, not one or two years. And while I’m still seeing healthy cash generation and dividend strength, I want to buy more.