5% And 11% Dividend Yields! Should You Buy Or Avoid These Income Stocks Today?
In this article I’m looking at two big-yielding UK shares. Do their monster yields make them too good to miss? Or could they prove to be catastrophic investment traps?
Housebuilder Persimmon’s a share I’d be very happy to get my teeth stuck into. Its yield sits above 5% for 2020 (at 5.2% to be exact). This FTSE 100 stock trades around the P/E bargain-basement benchmark of 10 times and below, too.
The UK housing market has been accused of being overheated for donkey’s years, with asset prices artificially pumped up by government support schemes. But in my opinion the recipe remains set for property values to keep on surging. House prices in the UK are rocketing even as the Covid-19 crisis rolls on, with prices rising a staggering 5.8% in October according to Nationwide.
There are many reasons why prices continue to rip higher. Interest rates are at record lows, and are possibly in line to move even further south. Government support through the Help to Buy equity loan scheme is set to continue for first-time buyers. And basic supply/demand dynamics remain in play as there simply aren’t enough homes to go around.
The only significant blot on the near-term horizon for housebuilders like Persimmon is that the Stamp Duty holiday is set to be axed next spring. This is a tax paid when property or land is purchased over a certain value in England and Northern Ireland. I’m not convinced that the government will pull the holiday at the end of March. But even if it does, those other factors I describe should keep homebuyer interest climbing.
And I’m not alone in my bullishness either. According to estate agency Savills, property prices in the UK will soar by a whopping 20.4% between now and 2024. Persimmon and its peers, then, would appear on course to enjoy a profits bonanza well into the new decade at least. And this famously-generous dividend payer should continue delivering big financial rewards to its shareholders, too.
I wouldn’t be as keen to load up on BP shares, though. This is even though the FTSE 100 oilie carries a delicious forward dividend yield of 11.5% right now.
Crude oil prices have got a spring in their step in recent days. The Brent benchmark has gained almost four bucks in less than a week as expectations of a Joe Biden presidency — and hopes of a fresh stimulus package to aid the economy recovery — have risen.
But Biden seizing the White House isn’t likely to be all good news for the oil price. As ING Bank has recently commented: “the shorter term outlook [for oil] would be bearish, given the increased likelihood that the Democrats take a softer approach towards Iran, which could lead to the lifting of sanctions, and so the return of Iranian oil supply to the market.”
On top of this, a rising Covid-19 infection rate and the re-emergence of lockdowns all over the globe casts additional concerns for the oil price. These demand worries pushed Brent crude to its cheapest since May last week around $37.90 per barrel. Throw in sign that the OPEC+ cartel is reluctant to increase production cuts and the outlook for black gold values is pretty grim.
So forget about that double-digit dividend yield, I say. BP is on course to post big losses this year. And I doubt that it will have either the balance sheet strength nor the appetite to pay big dividends in the current climate. I’d avoid this UK share at all costs.