Is a 9% yield from one of the UK’s most reliable dividend shares too good to be true?
Investors often need to be wary of shares with 9% dividend yields. Taylor Wimpey (LSE:TW), however, has an unusual policy that makes its distributions unusually resilient.
As a result, the firm has largely managed to maintain its returns to shareholders in a weak housing market. But even for passive income, there’s more to a stock than its dividend.
Durable dividends
Higher interest rates have caused dividends from UK housebuilders to fall sharply. Bellway (-58%), Berkeley Group (-83%), and Persimmon (-74%) have all made big cuts since 2022.
By contrast, Taylor Wimpeyâs dividend is almost exactly where it was three years ago. In the context of whatâs been going on in the wider industry, thatâs outstanding.
The reason is that Taylor Wimpey has a unique dividend policy. Rather than returning cash to shareholders based on its earnings â as most businesses do â it does this based on its assets.
This makes for a much more stable income stream for investors. But it can mean the firm pays out more than it brings in â and this is whatâs been happening over the last few years.
It’s also why I expect the dividend to be relatively resilient in 2026. Even if the housing market remains subdued, the firm has a lot of assets that should support returns to shareholders.
In fact, I think this can carry on well beyond 2026. And as long as the dividends keep coming, do investors looking for passive income really need to worry about anything else?
Investing
Anyone wanting an answer to that question can choose between the long answer and the short answer. The long answer is âyes, they doâ and the short answer is âyes.â
Taylor Wimpey has been distributing more than itâs been making, but the cash has to come from somewhere. And the effect has been showing up on the firmâs balance sheet.
The company doesnât have a problem with debt, or anything like that. But its book value (the difference between its assets and its liabilities) has been falling over the last couple of years.
In other words, the business has been acting like a (very) slowly melting iceberg over the last few years. The firm has â in effect â been financing its dividend by selling off its assets.
The stock trading at a price-to-book (P/B) ratio below 1 means this makes sense. But it canât go on forever and investors need to hope things pick up at some point in the future.
While Taylor Wimpey has maintained its dividend, the stock market has seen its book value declining. And thatâs why the share price is down 40% in the last four years.
High risk, high reward?
Taylor Wimpeyâs unique dividend policy has made it a more durable source of passive income than other housebuilders. But shareholders canât just ignore where that cash is coming from.
If things donât improve sooner or later, the dividend policy will accelerate the companyâs decline. And thatâs ultimately not much good to investors, whatever their ambitions are.
I do think the UK housing market is a promising avenue for investors to explore. But I’m looking at another name for my own portfolio.
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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.
