At 8.5%, is this dividend yield too good to be true?
Looking across the FTSE 100, investors are seemingly spoilt for choice when it comes to finding high dividend yields. Among these opportunities sits UK homebuilder Taylor Wimpey (LSE:TW.). Since October 2024, the stock has suffered a pretty significant 32% drop in valuation. Yet the dividends have continued to flow, resulting in a pretty attractive 8.5% yield for income investors.
Typically, seeing yields this high is a giant red flag. But that’s not always the case, and there are a few rare exceptions that go on to unlock jaw-dropping wealth for smart investors. So, is Taylor Wimpey one of these exceptions?
The state of Britain’s housing market
It’s no secret that the UK isn’t building enough homes. So, when Labour announced its plans to cut the red tape surrounding homebuilding, there was understandable excitement among investors that saw the entire sector rise on the election results last year. However, within a few short months, that excitement started to fade away.
Why? Because these businesses started reporting results. And they didn’t exactly contain the rebound everyone was seemingly expecting.
It turns out that even with easier-to-acquire planning permission, home affordability remains problematic in the current mortgage rate environment. That’s been made clear in Taylor Wimpey’s latest results, which reported fewer home completions and lower average selling prices.
As a consequence, the group’s profit for 2024 came in 37% lower than 2023 at £219.6m from £349m. Earnings volatility is to be expected in a cyclical industry like housing. But what’s more concerning is £335m of dividends was paid. In other words, management has been dipping into its cash reserves to afford its shareholder payout — not good.
Incoming dividend cut?
Despite the concerning decision by management to pay out more than it can afford, a dividend cut isn’t guaranteed to happen. As economic conditions slowly improve, mortgage rates fall, and material costs shrink, Taylor Wimpey’s margins could be set to improve.
Such a recovery could also be supercharged if the government continues to flirt with the idea of introducing a variation of its predecessor’s Help to Buy scheme. After all, this scheme accounted for approximately half of Taylor Wimpey’s sales in 2020. And with a landbank of 79,000 plots, the firm certainly has the capacity to capitalise on such a policy.
In other words, Taylor Wimpey could be a screaming bargain today. However, that all depends on whether activity within the UK housing market starts to ramp back up, either organically or through stimulative government policy. If the recovery ends up being sluggish, then there’s only a limited supply of cash available to maintain today’s 8.5% dividend yield.
As of December 2024, the group has around £565m of net cash left on the balance sheet, down from £678m a year ago. And operating profits for 2025 are currently expected to reach £444m, up from £416m in 2024. But overall, there’s a lot of uncertainty surrounding this enterprise. And with other high-yield income opportunities to pick from, investors may want to consider looking elsewhere until Taylor Wimpey’s position is clarified.
The post At 8.5%, is this dividend yield too good to be true? appeared first on The Motley Fool UK.
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Zaven Boyrazian has no position in any of the shares mentioned. 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.
