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I’m looking to add another FTSE 100 dividend stock to my portfolio and plenty of blue-chips now combine very cheap share prices with ultra-high yields. I wouldn’t buy them all, though.
Housebuilder Persimmon (LSE: PSN) is cheap as chips. It trades at just four times earnings and yields 6.08%. We all know why, of course. The UK housing market is built on shaky ground as mortgage rates rise, buy-to-let landlords flee and arrears grow.
Cheap isn’t always good value
Persimmon has been hit harder than most. Its share price has crashed 60.21% over five years and 33.31% over 12 months. And it’s still falling.
Earlier this month the firm posted a 29.5% drop revenues to £1.19bn with profits before tax collapsing 66% to £151m. Cost inflation is squeezing margins too.
Last year it was yielding almost 20%, but that was never sustainable. It slashed the dividend by 75% in March, while the latest interim dividend of 34.4p was roughly a third of last year’s payout. It’s also announced 300 job losses.
Persimmon has a cash cushion of £360m, down from £780m last year. I’m regularly tempted by bombed-out stocks like this one, but I think it has a long, arduous journey ahead of it as interest rates could stay higher for longer.
Another troubled high yielder
Telecoms giant Vodafone (LSE: VOD) is a seriously afflicted FTSE 100 stock that offers the temptation of an almighty dividend. It currently yields a thumping 10.83%, the biggest on the index. It looks cheap too, trading at 7.3 times earnings.
The share price is down 59.49% over five years and 38.85% over 12 months. It also continues to fall, which is pretty much what it’s been doing the entire millennium. New CEO Margherita Della Valle has a tough job on her hands. Q1 revenue rose 3.7% to €10.7bn, but it’s still falling in the company’s German, Spanish and Italian markets.
I’m not alone in thinking the Vodafone dividend is vulnerable. Some reckon a 30% cut is already priced in, which I suppose offers some downside protection. But I’d rather buy into a yield that I will receive, rather than one I won’t.
Which brings me to Legal & General Group (LSE: LGEN). It yields 9.11% while trading at a bargain 5.5 times earnings, and is currently my favourite FTSE 100 income stock of all.
L&G’s shares are also struggling, down 16.82% over five years and 17.69% over one year (and still dropping). Yet I feel the underlying business has far more solid fundamentals than Persimmon or Vodafone.
It recently reported a small dip in first-half operating profits of £941m (down from last year’s £958m) but has balance sheet strength as its Solvency II coverage ratio climbed from 212% to 230%, with surplus funds of £9.2bn.
I’ve made my choice
Stock market volatility has hit assets under management and reduced new customer inflows, but L&G has diversification via annuities, protection and pensions.
The board has increased its dividend per share for the last five years, and this is expected to continue in 2023 and 2024. By then it’s expected to yield 9.78%. Over the same period, Persimmon’s dividend has been slashed and Vodafone’s frozen at 90 euro cents. I’ve bought L&G shares on two occasions recently and would buy more before considering either Persimmon or Vodafone.
