9% yield! But is a huge dividend a big problem for this FTSE 250 stock?

Taylor Wimpey (LSE:TW) is a relative newcomer to the FTSE 250, having fallen out of the FTSE 100 earlier this year. And the stock comes with a nice-looking 9% dividend yield.

Unlike other UK housebuilders, the company’s mostly maintained its dividend through some difficult trading conditions. But this hasn’t actually worked out so well for investors.

Returns

Over the last five years, Taylor Wimpey has returned just under 42p per share in dividends. Based on where the stock was then, that’s a 28% return. Unfortunately, the share price has fallen by 31% in that time. So investors who bought the stock in November 2020 are now worse off as a result.

That’s not a good sign, but investors might think they’d have been worse of without the dividend. At least this offsets some of the effect of the declining share price, right?

While it’s natural to see things this way, I think it’s a mistake. As I see it, Taylor Wimpey’s dividend is a major reason why the stock’s been going down.

Dividends

Taylor Wimpey shares currently trade at a price-to-book (P/B) ratio of 1. That means the difference between its assets and its liabilities is the same as its market value.

When the company sends out a dividend, it takes cash from its balance sheet and returns it to shareholders. As a result, its book value goes down by the amount it sends out.

Other things – specifically the multiple the stock trades at – being equal, the firm’s market value goes down by that much when it pays a dividend. And that’s largely what’s happened. If Taylor Wimpey had retained the 42p per share it sent out since 2020, a P/B ratio of 1 means the stock would have been that much higher. But it hasn’t, which is why the stock’s down.

Outlook

There’s no shortage of demand for UK housing at the moment. But this has been the case for the last five years and it hasn’t exactly made Taylor Wimpey shares a good investment.

The major obstacle to meeting this demand for homebuilders across the board has been getting plans approved. This is something to keep an eye on in the UK Budget. 

The government’s behind on the housing targets it set during the election campaign. So there’s a chance action might be on the way to make building easier. There are reports this is on the cards. And if this proves to be correct, it could get Taylor Wimpey’s business – and its share price – moving. 

Final Foolish thoughts

Taylor Wimpey has a stronger record of maintaining its dividend than most housebuilders. But the stock hasn’t been a good investment in recent years. In fact, over the last couple of years, the firm’s been distributing more cash to shareholders than it has been bringing in. And that’s likely to make the stock go down over time.

For someone looking for resilient passive income, the stock might be worth considering. But I think there are probably better opportunities elsewhere.

The post 9% yield! But is a huge dividend a big problem for this FTSE 250 stock? appeared first on The Motley Fool UK.

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Stephen Wright 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.

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