These dividend stocks pay huge 10-20% yields! But can I trust them?

The housebuilding sector has some of the highest paying dividend stocks on the FTSE 100 and FTSE 250. In fact, Persimmon (LSE:PSN) is the highest paying stock on the FTSE 100. At the time of writing, the dividend yield is almost touching 20%. In other words, in the unlikely event the dividend remained constant, it would take me five years to make my investment back.

So let’s take a closer look at the sector and explore whether any of these stocks are right for my portfolio.

Budget-induced chaos

The chancellor’s first mini-budget has not been good for housebuilder stocks. Persimmon, Barratt Developments (LSE:BDEV) and Vistry (LSE:VTY) are all down more than 10% over the past week. Performance over 12 months is pretty terrible too — Persimmon -52%, Barratt -42%, Vistry -48%.

The government announced that stamp duty would be reduced and, of course, this can be seen as positive for the industry. Less stamp duty would incentivising buying — which has seen downward pressure as interest rates rise — and may even provide housebuilders with the opportunity to raise prices, which have flattened in recent months.

But the idea that fiscal policy is working at odds with monetary policy is not positive. And it appears the Bank of England will now need to raise interest rates further in an attempt to bring down inflation. In fact, some analysts now see interest rates reaching as high as 6% towards next summer.

This was followed by the news that some banks had started withdrawing mortgage products in the wake of turmoil on the foreign exchange markets. Halifax, part of the Lloyds Banking Group and one of the UK’s biggest lenders, said it had decided to temporarily stop offering all of its mortgage products which charge a fee for borrowers.

According to Moneyfacts.co.uk, mortgage lenders including Virgin Money, Vida Home Loans, Skipton Building Society, the Bank of Ireland and Post Office Money have stopped lending entirely. Clearly this will impact demand, and the availability of funding, for new homes.

Big dividends, but can they be trusted?

Housebuilders were already offering some pretty sizeable dividends. But with share prices collapsing over the past week, dividend yields in the sector have soared.

While I had been pretty bullish on housebuilders, unfortunately my optimism is waning. With interest rates set to be raised even more than originally anticipated, I think most potential homebuyers will find rates to be prohibitive. Especially when we’ve been used to near-zero rates for over a decade.

House prices are set to remain flat, while cost inflation is set to be running around 5%. And this will harm margins. With margins falling, it’s hard to imagine that housebuilders can keep their dividends up.

However, all three of these stocks are trading at their lowest points for eight years. And in the long run, I’m confident things will improve. After all, there is an acute shortage of housing in the UK, and I’m a perennial optimist when it comes to the UK economy.

Despite this, right now I’m not buying. I fear volatility could hit the housing sector more than others and these big yields don’t appear sustainable in the current climate.