As a holder of Persimmon (LSE: PSN) shares for a little over a year, it’s been a case of so far, so good in terms of performance. The stock’s climbed just 43% since July 2023 and just under 8% in 2024 to date.
But I believe things could get even better. Here’s why I’ve been adding to my position in July.
Reason 1: more houses being built
The arrival of a new government could be just the thing the property market needs.
Earlier this week (8 July), new chancellor Rachel Reeves said she would be bringing back compulsory housebuilding targets with the intention of getting 1.5 million homes in England constructed over the next five years. Part of this would be achieved by prioritising previously developed brownfield land and neglected grey-belt land.
It’s easy to set ambitious targets during the ‘honeymoon period’. Still, I’m encouraged that this particular one seems to be a priority for premier Keir Starmer and co.
Reason 2: interest rate cuts
Another potential catalyst for the next boom in the housing market is falling interest rates. The first cut might not be much, but that’s not the point. Potential buyers just want to know that borrowing’s finally going to get cheaper after four years.
Of course, the market’s arguably already priced this in as inflation has slowed. However, a number of cuts is short succession could push analysts to revise their earnings estimates for the business.
That could/should be great news for the share price.
Reason 3: great dividends
A final reason I’ve been buying Persimmon shares is for the passive income they throw off. Right now, the dividend yield sits at just under 4.1%, but I could get a lot more elsewhere in the UK market. A quick search shows some stocks yielding nearly 10%!
But what looks too good to be true often is. Firms boasting higher-than-average yields are often doing poorly. When this happens, investors jump ship and the share price tends to fall. This pushes the yield up.
This was exactly the case with Persimmon until, in 2022, the total dividend was cut by 75%.
Thankfully, it now looks far more affordable.
A few things to keep in mind
First to bear in mind is that the situation won’t change overnight. Britain’s new PM is keen to set expectations low from the off. Local councillors won’t like the idea of lots of new homes being built either.
Second, no one knows for sure when interest rates will be cut or by how much. An expected rebound in inflation could easily prompt the Bank of England to wait a little longer.
Third, the dividends of any company are never guaranteed. While it would be pretty embarrassing for Persimmon’s management to make another cut, I would never rule it out.
The only ‘free lunch’
Taking the above into account, it’s vital to keep my feet on the ground. While admittedly biased about Persimmon, I’m still making making sure my portfolio’s sufficiently diversified. This is just about the only ‘free lunch’ in investing.
On the whole however, I’m getting increasingly positive on the company’s outlook. I suspect my most recent Buy won’t be my last.
This post was originally published on Motley Fool
