A stock I won’t buy despite its HUGE 16.4% dividend yield, and one I would

High dividend yield can attract many income investors. And after the stock market correction in 2022, finding these opportunities becomes easier. After all, when stock prices fall, yields rise.

However, as good as double-digit payout rates sound, they rarely last. Don’t forget dividends are funded through excess cash flow. And if earnings are compromised, they are often cut, or even canceled. And suddenly, the high yield can drop to zero.

With that in mind, I steered persimmon (LSE: PSN). The Homebuilder Company currently offers a 16.4% dividend yield. But some glaring red flags indicate that this may be too good to be true. Let’s take a closer look and explore other income stocks that I believe are better buys today.

The problem with Persimmon’s dividend yield

As a quick reminder, Persimmon is one of the most active house building companies in the UK. And with housing demand increasing over the past two years, especially in 2020 when stamp duty is suspended, profits are on the rise.

To capitalize on rising house prices, management increased building rates, and shareholders got some very nice dividend payments. But the gravy train is over now.

Looking at recent trading updates, the company’s forward sales position between January 2021 and 2022 has dropped by 36%. It appears that rising mortgage costs on the back of rising interest rates have significantly dampened demand.

While property values ​​are still rising, this upward trend may soon return. And with the cost of construction materials still rising due to inflation, Persimmon’s profit margins are expected to be understated in the short term. That means less earnings and, thus, a cut in dividends.

In fact, based on the average analyst consensus, the dividend per share forecast for 2023 is expected to land at 92p – a 50% crash over 2022. If this forecast is accurate, the company’s actual dividend yield would be closer to 6.3%.

That is still respectable. But with uncertainty surrounding the UK housing market, dividends may suffer in 2024, and the share price has fallen.

Better income opportunities?

Fortunately, there is more than one way to invest in the real estate market. While the residential sector is on fire, commercial properties are becoming more resilient. And that’s why Londonmetric property (LSE:LMP) looks better, despite its dividend yield of just 4.9%.

The company manages a diverse portfolio of commercial properties that primarily include warehouses. When the group experiences property devaluation, these reported costs do not affect cash flow. And despite the slowdown in consumer spending, e-commerce continues to boost demand for warehouse space.

As a result, Londonmetric’s earnings actually doubled. Meanwhile, as the company mainly leases to industry-leading companies, the occupancy rate remains solid at 98.7%, with an average lease length of 12 years. As a result, management only increases the dividend which leads to higher returns.

A prolonged decline in consumer spending will weigh on the employment rate. Needless to say, this will make it more challenging to negotiate higher rates on contract renewals. But in the long run, as more shopping is done online, demand for warehouses may increase significantly, possibly increasing dividends. I will buy more if I have money to spare.