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Builder Khaki (LSE:PSN) has made some healthy gains in its share price in recent weeks. However, at current prices of around £11.60, the FTSE 250 The business still generates dividend yields well above the index average. This indicates that it could be a good way to generate passive income.
At 5.1%, the builder’s yield for 2023 beats the FTSE 250’s forward average of 3.7%. Next year, it will hit an even more impressive 5.2%.
Do these figures make you the first? FTSE 100 Is sharing too good to ignore? Or should you avoid Persimmon stock like the plague as the housing market weakens?
More poor data
The latest data from right movement Monday highlights the problems facing the UK’s housebuilding fair. It showed that average home prices fell 1.7% this month, marking the biggest November drop since 2018.
The property listings company said that “There are still buyers, but for many their affordability is greatly reduced due to higher mortgage rates..”
That said, Rightmove’s latest investigation did contain some crumbs of comfort. It also showed that agreed sales are now 10% below more normal 2019 market levels. That’s not ideal, but it’s better than October’s 15% drop.
Dividends in danger?
I believe the long-term prospects for Britain’s housebuilding sector remain strong. That’s why I still own Persimmon shares. But I have no intention of increasing my bet.
I expect that, as economists increasingly expect, interest rates will begin to fall starting next year. This will give a big boost to buyer affordability. But I am concerned that house sales could remain stagnant as the British economy appears headed for a prolonged struggle.
Today’s Rightmove data is particularly worrying for me as a dividend-seeking Persimmon shareholder. Current profit projections for the business already cast doubt on the level of shareholder payouts City analysts are tipping.
The payments planned for 2023 and 2024 are covered 1.4 times by expected earnings. A reminder that any reading less than 2x is classified as being in the “danger zone”.
This erosion is also concerning given how quickly cash reserves are declining. Cash fell to £360m in June from £780m a year earlier.
A murky perspective
It’s true that the news from Persimmon itself hasn’t been entirely pessimistic lately. This month he raised his full-year construction target to 9,500 homes. That’s up from the low of 9,000 that was forecast in August.
But the data elsewhere was bleak. Completions fell 37% in the three months to September, to 1,439, while its order book also plunged by more than a third year-on-year to £930m.
Persimmon also warned this month that market conditions “will remain very uncertain”Looking ahead to 2024.
Homebuilders like this have a solid track record of paying above-average dividends. But in the current climate, I think buying them for passive income is a great bet. For this reason, I prefer to search the UK markets for other dividend stocks to buy.
