Earlier this summer, my wife and I built a new standalone portfolio of cheap shares. In total, we bought 10 new stocks. These included six blue-chip FTSE 100 shares and three mid-cap FTSE 250 shares, plus a single US stock. We built this portfolio to generate extra passive income, so all 10 stocks offered attractive dividend yields. But the investment with the highest cash yield — Persimmon (LSE: PSN) shares — is the worst-performing by far. So what went wrong?
Was buying Persimmon shares a mistake?
As I write on Monday morning, Persimmon shares trade at 1,427p, down 1% since Friday’s close. Here’s how they’ve performed over six timescales:
| Five days | -4.4% |
| One month | -22.9% |
| Six months | -38.2% |
| 2022 YTD | -50.1% |
| One year | -50.4% |
| Five years | -43.8% |
The Persimmon share price has had a horrendous time since April 2021, crashing by more than half this calendar year and over the past 12 months. At their 52-week high, the shares peaked at 2,930p on 4 January, so they’ve been one of the FTSE 100’s worst performers in 2022.
For the record, my wife bought these slumping shares in late July at an all-in price (including stamp duty and dealing commission) of £18.56. Six weeks later, they have lost almost a quarter (-23.2%) of their value. Ouch.
Remind me why I bought this crashing stock
We decided to buy Persimmon shares for three main reasons. First, to gain exposure to the UK property market — with a market value of £4.6bn, the group is the UK’s second-largest housebuilder. Second, because its shares looked cheap at the time, thanks to a lowly price-to-earnings ratio (P/E). Third, because this stock offered the highest dividend yield in the FTSE 100 when we bought it — and still does.
Unfortunately, things have gone from bad to worse for the UK economy this summer. Energy costs — especially wholesale gas prices — have skyrocketed, pushing up already red-hot inflation. With consumer prices and interest rates soaring, fears are rising that our economy will plunge into recession. This could drag down house prices and transaction levels, delivering a double whammy to Persimmon and its shares.
This stock looks dirt-cheap to me for the long term
After their recent steep falls, Persimmon shares have been dumped in Mr Market’s bargain bin. Right now, they trade on a P/E of 6.2, for an earnings yield of 16.1%. What’s more, their dividend yield has soared to a whopping 16.5% a year — almost unheard-of territory for a FTSE 100 stock.
But company dividends are not guaranteed, so they can be cut or cancelled at any time. And I think fears of a potential dividend cut by Persimmon in 2022-23 have added to selling pressure on this stock. After all, double-digit cash yields are pretty rare in the FTSE 100. But even if Persimmon were to halve this payout, it would still be a juicy 8.25% a year. And that’s why I’m holding on for the long term.
Lastly, though Persimmon shares have been battered, our new portfolio is doing fine. Five stocks are up and five are down, with this pot having only lost 2.3% of its value to date. Once again, this demonstrates the value of diversifying my investments to reduce the risk of large losses!