I bought this FTSE 100 stock for big dividends. Big mistake!

Young Asian woman with head in hands at her desk

So far, 2022 hasn’t been great for global investors. At the end of 2021, I repeatedly warned that US stocks were expensive and priced to fall. As of December 31, 2021, the US S&P 500 index is down 16.6%, much further down. But when I realized UK stocks were dirt cheap, my wife and I bought several cheap FTSE 100 shares.

FTSE 100 stocks dodge the storm

As a value investor, I like to buy cheap and overlooked stocks. For me, the best place to find it is in the FTSE 100. For example, from the end of June to the end of July, my wife and I bought six FTSE 100 shares (and three FTSE 250 equities) that we considered too cheap.

Overall, we’re happy with our new value stocks. That said, one stock stands out as a disastrously timed buy. Enticed by the mouth-watering 12.1% dividend yield at the time, I urged my wife to buy one FTSE 100 share. How I wish I had stayed quiet.

This FTSE 100 stock crashed

In the interest of silly honesty and transparency, here’s what I (and not my wife) did wrong. I also admit that our disastrous decision to buy shares in a leading UK homebuilder persimmon (LSE: PSN) was entirely my fault.

Indeed, my wife asked why she would buy a real estate company when I predicted a house crash in 2023? I replied that this stock offered the highest cash yield of the FTSE 100 stocks. Alas, I was about to be humiliated.

We bought Persimmon shares at the end of July at an all-in price (including transaction costs and stamp duty) of 1,855.9 pa share. They then crashed brutally, plunging to a 52-week low of 1,113.5p on October 12. At that point we had a paper loss of two-fifths (-40%) of our initial investment 3½ months ago. D’oh.

On the way back?

Fortunately, Persimmon shares have recovered somewhat. They are currently trading at 1,268p, down 31.7% from our purchase price – and down more than half (-53.2%) in 12 months. At the current share price, this FTSE 100 company is valued at less than £4.1 billion. This is more than three-fifths (-61.3%) below the all-time highest capitalization level, reached in pre-Covid February 2020.

Right now, Persimmon stock looks incredibly cheap based on fundamentals. It trades at a P/E ratio of 5.52, which equates to an earnings yield of 18.1%. Also, its trailing dividend yield of 18.5% is the highest among FTSE 100 stocks.

Now for the bad news

I repeat: I was drawn to buy this FTSE 100 stock because of the huge cash yield. But this double-digit dividend yield is doomed in 2023. Persimmon is already reporting declining home sales and future reservations, lower sales prices and more cancellations.

To me, this indicates that Persimmon’s annual cash dividend of 225 pence per share is a thing of the past. Indeed, the company recently suspended its previous payout policies and forecasts. Therefore, I expect this payment to tumble in 2023, perhaps to mid-single digits in the future.

My biggest lesson from this blunder is that I shouldn’t be mesmerized by double-digit dividend yields. Going forward, my goal is solid and reliable dividends, not skyrocketing cash returns. On the other hand, we will not be selling this FTSE 100 share for a while. After a tough 2023, I’m hopeful for Persimmon’s recovery, so we’re holding on!

The post I bought this FTSE 100 stock for big dividends. Big mistake! first appeared on The Motley Fool UK.

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Cliffdarcy has an economic interest in Persimmon stock. The Motley Fool UK has no position in any of the listed stocks. Opinions about the companies mentioned in this article are those of the author 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 wide range of insights makes us better investors.

Motley UK 2022

I bought this FTSE 100 stock for big dividends. Big mistake!

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