12.6% yield! Should I buy this FTSE 100 share for its dividend forecast?

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The Persimmon (LSE: PSN) share price has declined by a third in the year to date. And as a consequence, the house builder’s forward yield sits at an enormous 12.6% based on its current dividend forecast.

Persimmon’s dividend yield is more than three times larger than the 3.7% average yield for FTSE 100 shares. And it’s why I chose to buy the dividend stock for my own stocks portfolio a couple of months ago.

But is the company’s dividend forecast looking as strong as it was back then? And would I buy the FTSE stock today?

A tough 2022

On one hand, the outlook for the house builders is shakier than it was when I bought back in June. Consumer prices continue rising more strongly than expected, so the Bank of England is getting tougher to tackle the inflationary bubble.

The Bank’s hiked its benchmark rate for five months on the spin. And this week it’s expected to raise the rate by 0.5%, the largest increase for 27 years.

Higher interest rates mean larger borrowing costs for homeowners. This usually leads to a cooling in the housing market as buyer demand subsequently sinks.

Rising interest rates aren’t the only growing problem for Persimmon, either. Since I bought in, the company has reduced its building target for 2022 due to “delays in the planning system, disruption in material supply chains and challenges in securing labour”.

A beaten-down bargain?

But despite these issues I’d still buy Persimmon shares today. Particularly so as it now trades on a forward price-to-earnings ratio of just 7.6 times.

Interest rates are rising, sure. But so far the housing industry has remained extremely resilient, suggesting that the sell-off in Persimmon shares has been overdone.

Halifax has said that property prices rose at their fastest pace in 18 years in June, in fact. And Persimmon said last month that its forward sales were up £50m year on year as of June, to stand at £1.87bn.

Drilling into the dividend

From a long-term perspective, then I believe Persimmon remains a top FTSE 100 stock to buy. The country’s chronic homes shortage appears here to stay, meaning property prices (and profits at companies like this) should rise strongly over the next decade.

But how realistic is Persimmon’s dividend forecast in the near term?

City analysts think the builder will deliver a dividend payout of 238.8p per share in 2022. This is only just covered by predicted earnings per share of 249.9p. Any dividend cover below two times is considered risky for income investors.

However, Persimmon’s strong balance sheet could give it the means to meet the dividend forecast even if earnings disappoint. Even after fresh land purchases and distributions to shareholders, it had £780m of cash as of June.

A FTSE 100-beating stock

And what’s more, if the eventual payment fails to match up to that 12.5% yield, it’s still likely the company will beat the 3.7% FTSE 100 average by a huge distance. Persimmon’s dividend would have to fall to around 70p per share from 235p in 2021 for it to equal the index’s average yield.

All things considered I believe Persimmon shares still look massively oversold. In my opinion it remains one of the best bargains on the FTSE 100 today.

The post 12.6% yield! Should I buy this FTSE 100 share for its dividend forecast? appeared first on The Motley Fool UK.

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Royston Wild has positions in Persimmon. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.