A 9.4% yield and 71% undervalued — time for me to buy more of this FTSE 100 passive income star?
FTSE 100 housebuilder Taylor Wimpey (LSE: TW) is down 23% in the past 12 months. As a stockâs dividend yield rises when its price falls, this has pushed up the return to a whopping 9.4%.
This is more than triple the current FTSE 100 average of 3.1%. It is also more than double the ârisk-free rateâ (the 10-year UK government bond yield) of 4.4%.
Having bought the stock a while back, I wonder if now is the time to buy more?
What’s my key consideration?
My primary concern is how reliably it can maintain such a high dividend yield.
The consensus of analysts is that Taylor Wimpey will pay a dividend of 93.3p this year, 90.9p next year, and 92.1p in 2027.
Based on the current £1.01 share price, these would generate respective yields of 9.2%, 8.9%, and 9.1%.
Crucial earnings growth factor
Looking deeper, it is ultimately the case that any firmâs dividend returns are driven by its earnings (or âprofitsâ) growth.
A risk to Taylor Wimpeyâs is any significant worsening in the cost-of-living crisis.
However, analysts forecast that its earnings will grow a stellar 35.1% a year to end-2027.
In this context, its H1 2025 figures looked promising. Revenue rose 9% year on year, while home completions jumped 11% to 5,264. The firm said it would hit 10,400-10,800 UK completions this year compared to 9,972 in 2024.
It reiterated this guidance in its 12 November trading update. It also underlined that it expected to make an operating profit of around £424m this year, against £416m last year.
I believe further catalysts for growth are government measures to boost the UK housing market. The broad aim is to build 1.5m houses over its five-year tenure. And more recently, Chancellor Rachel Reeves announced another £10bn to be spent on new houses.
A share price bonus?
I do not sell stocks I hold for passive income unless their dividend yields fall below 7%. Such a fall would reduce the compensation over the risk-free rate that I get for taking the additional risk in share investment.
However, if I must sell, I would rather make a profit. And the chance of this occurring increases the more undervalued the stock is to begin with.
In Taylor Wimpeyâs case, a discounted cash flow valuation shows the shares are a stunning 71% undervalued at their current £1.01 price.
Therefore, their âfair valueâ is £3.48.
How much dividend income can I make?
As of now, another £10,000 investment in the firm would make me £15,506 in dividends after 10 years. This factors in reinvesting the dividends back into the stock (âdividend compoundingâ).
Over 30 years on the same basis, the dividend payout would rise to £155,935.
Including the £10,000 investment, the value of the holding would be £165,935 by then.
And that would pay me a yearly dividend income of £15,598! But of course, this is not guaranteed and I could lose money as well as make it.
My investment view
Given its very strong earnings growth prospects, extreme undervaluation and ultra-high yield, I will buy more of the stock as soon as possible.
And I also have my eye on other undervalued, high-yielding stocks too.
The post A 9.4% yield and 71% undervalued — time for me to buy more of this FTSE 100 passive income star? appeared first on The Motley Fool UK.
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Simon Watkins has positions in Taylor Wimpey Plc. 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.
