7.8% dividend yield! Should I buy this cheap FTSE 100 income share?

I am looking for the best FTSE 100 dividend stocks to buy for my portfolio before this week’s Stocks and Shares ISA deadline. and persimmon(LSE:PSN)’s dividend yield has attracted attention once again.

Based on current dividend forecasts, the housebuilder has a dividend yield of 6.2% for 2023. This is higher than the 3.8% average for FTSE 100 stocks.

Things are also getting better for 2024. Next year, the annual yield is up to 7.8%.

However, I am confused about adding to my current holdings in Persimmon. Are these income stocks too risky?

Weak dividend coverage

First, let’s look at those short-term dividend estimates and consider how realistic they are.

Persimmon is cutting its shareholder payout in 2022 as home sales slump and the threat of a prolonged downturn looms. The full-year dividend fell to 60p per share from 235p a year earlier.

But City analysts expect dividends to resume from this year. Full-year payouts of 77.3p and 97.3p per share are anticipated for 2023 and 2024, respectively.

Unfortunately, these predictions are not well protected. Coverage ranges between only 1.2 times and 1.4 times over the next two years. This is below the second benchmark which provides a wide margin of safety.

… but the strength of the balance sheet

In better news, Persimmon has one of the strongest balance sheets in the business. Therefore, if the earnings are disappointing if they still have the financial strength to make dividends that City analysts anticipated.

Cash on the books is down 30% in 2022 as market conditions worsen. But the business still had £861.6m of cash on its balance sheet at December 31.

It is also worth mentioning that Persimmon’s dividend coverage has long lagged its safety target twice. But the business still has a good record of paying above-average dividends. A bad cover then for the next two years may not be as alarming as it seems at first.

Not necessarily the market

Having said that, the UK housing market is facing the highest level of uncertainty since the 2007/08 financial crisis. In this landscape I would look for better dividend coverage today.

The latest nationwide industry report shows average home prices fell 3.1% in March. It was the biggest annual decline since the summer of 2009 as buyer interest remained weak.

Here’s what I’m doing right now

I still believe that holding onto existing Persimmon stock is a good idea. This is because I expect house prices to rise strongly over the long term.

The population of England continues to grow. But home activities are not expanded to meet the growing demand. In fact, there will be just 409,500 planning applications in 2022, a 14% year-on-year increase. In this landscape, I expect home prices to continue to advance sooner rather than later.

This does not mean that I will buy more Persimmon shares for passive income, though. There is still a lot of market uncertainty, which means dividends could be disappointing in the next few years.

That’s why I’d rather buy another cheap FTSE 100 stock for dividends today. There are definitely many top stocks that I can pick from below the recent stock market volatility.