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I’m looking for the best FTSE 100 dividend stocks to buy for my portfolio before the Stocks and Shares ISA deadline this week. AND KhakiThe dividend yield of (LSE:PSN) has once again caught my attention.
Based on current dividend forecasts, the homebuilder has a dividend yield of 6.2% by 2023. This is well above the FTSE 100 stock average of 3.8%.
Things will also get even better by 2024. Next year, the annual return jumps to 7.8%.
However, I am divided on whether to add to my existing khaki holdings. Is this income stock too risky?
Weak dividend coverage
First, let’s dig into those short-term dividend estimates and consider how realistic they are.
Persimmon cut payments to shareholders in 2022 as home sales collapsed and the threat of a long recession emerged. The full-year dividend fell to 60 pence per share from 235 pence a year earlier.
But city analysts expect dividends to start rising again starting this year. Annual payments of 77.3 pence and 97.3 pence per share are anticipated for 2023 and 2024, respectively.
Unfortunately, however, these predictions are not well covered by earnings. The coverage varies between just 1.2 times and 1.4 times over the next two years. This is well below the two-stroke benchmark that provides a wide margin of safety.
… but balance sheet strength
In better news, Persimmon has one of the strongest balance sheets in the business. So if earnings disappoint, it could still have the financial strength to deliver the dividends city analysts anticipate.
Cash on its books fell 30% in 2022 as market conditions worsened. However, the business was still worth £861.6 million in cash on the balance sheet as of December 31.
It’s also worth mentioning that Persimmon’s dividend hedge has long lagged behind the two-fold security target. But the business still has an excellent track record of paying above-average dividends. The poor coverage then over the next two years may not be as alarming as it seems at first glance.
Market uncertainty
That being said, the UK property market is facing its highest level of uncertainty since the 2007/08 financial crisis. Against this backdrop, I would be looking for better dividend coverage today.
The latest industry report from Nationwide showed median home prices fell 3.1% in March. This was the biggest annual drop since the summer of 2009 as buyer interest remained weak.
This is what I’m doing now
I still think keeping my existing Persimmon stock is a good idea. This is because I expect house prices to rise sharply over the long term.
The population of Great Britain continues to grow steadily. However, home construction activity is not picking up to meet growing demand. In fact, there were only 409,500 planning applications in 2022, a year-over-year drop of 14%. Against this background, I expect house prices to resume their strong advance sooner rather than later.
However, this does not mean that I will buy more shares of Persimmon to generate passive income. There is still too much uncertainty in the market, which means dividends could disappoint over the next couple of years.
For this reason, I prefer to buy other cheap FTSE 100 shares to get dividends today. There are certainly plenty of top stocks for me to choose from after the recent stock market volatility.
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