Should I buy these 2 income stocks with huge dividend yields?

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Income stocks are the basis of my portfolio. They provide me with regular sources of income through dividend payments that I receive at intervals throughout the year.

Right now is certainly an interesting time to be investing in income stocks. That’s because dividend yields, on the whole, are getting larger.

Some companies, including those explored below, are coming off the back of strong years, but there are concerns about the macroeconomic environment in the coming months.

So, with dividend payments remaining constant or rising and share prices falling, yields have risen. However, big yields can be a warning sign. So, can these stocks maintain their big yields or should I stay clear?

The biggest yield on the FTSE 100

Persimmon (LSE:PSN) has the highest dividend yield on the FTSE 100 — around 20%. That means it would only take five years to get my investment back assuming the dividend yield remained the same in the coming years.

But there are some dark clouds surrounding the housebuilding sector. Interest rates are rising and prices appear to have peaked. This isn’t positive when cost inflation is running at 5%.

However, I feel that these issues are more than priced in. In fact, Persimmon is trading near its lowest point in eight years despite having a stellar 2021 and H1 of 2022. And long-term demand for housing in the UK is likely to remain strong. After all, there is an acute shortage.

There’s also the matter of the fire safety pledge. While some housebuilders are losing a year’s worth of profits to recladding houses, Persimmon’s spend is only equivalent to 10% of 2021 income.

I already own Persimmon stock, and it hasn’t been good to me, but trading below 1,300p, I’d buy more. The dividend forecast for 2023 is 225p, down only 10p from 2022. But even if the dividend were halved, I still see this as a good return and far above the index average.

A big yielding bank

A 7% yield might sound small compared to Persimmon, but it’s still an excellent return on my investment. Close Brothers Group (LSE:CBG) provides securities trading, lending, deposit-taking, and wealth-management services. 

The FTSE 250 firm is currently trading at its lowest point in nearly 10 years. However, the firm has strong margins — around 7.8% — and as noted by RBC, has defensive qualities. And with interest rates rising, you’d expect the bank to be able to expand margins further, but that can work two ways.

Naturally, a deep recession and much higher interest rates may dampen demand for its services. And that wouldn’t be good for business. However, hopefully, especially with a more fiscally responsible prime minister at the helm, we can expect less turmoil.

Once again, I already own Close Brothers Group shares. But as the shares are trading under 1,000p for the first time in nine years, I’d buy more today.

The post Should I buy these 2 income stocks with huge dividend yields? appeared first on The Motley Fool UK.

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James Fox has positions in Close Brothers Group and Persimmon. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer 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 diverse range of insights makes us better investors.