Generating an 8% passive income with my share portfolio would certainly speed up my progress towards retirement. But can I really generate a reliable 8% yield from dividend stocks?
Today I want to look at a FTSE 100 share with a forecast yield of 8%. This company passes many of my dividend safety checks and recently reported strong customer demand. Should I buy this high yielder for my portfolio?
The company in question is FTSE 100 housebuilder Taylor Wimpey (LSE: TW). The nature of this business gives me some idea why the shares have fallen by 25% over the last year.
Rising interest rates, surging inflation and the risk of a recession clearly pose some risks to the housing market.
However, the reality is that Taylor Wimpey is in good shape financially. The company reported net cash of £837m at the end of 2021 and is continuing to report strong demand for new houses.
A contrarian opportunity?
Taylor Wimpey reported a £2.9bn order book in April, representing almost 11,000 homes. That’s equivalent to 65% of the company’s forecast sales for the whole of 2022.
Other major housebuilders are also reporting stable demand for new homes. In short, housebuilders’ share prices may be falling, but the UK housing shortage still appears to be a real problem.
Demand for new homes is probably being helped by the continued availability of cheap mortgages. Although interest rates are starting to rise, mortgage rates remain low. I’ve just looked on my mortgage lender’s website and I could get a five-year fixed-rate deal today at a rate of just 3.1%.
If interest rates keep rising then I’d guess mortgage deals like this might disappear. But for now, borrowing still seems very cheap to me.
Are Taylor Wimpey shares cheap today?
I’ve avoided buying housebuilders’ shares over the last couple of years, because I’ve been worried that they were starting to look expensive.
However, after falling 25% over the last 12 months, Taylor Wimpey shares are starting to look a lot more affordable to me.
At current levels, the stock is trading in line with its net asset value of 118p per share. Using an alternative measure, the shares are trading on a price-to-earnings (P/E) multiple of just six times 2022 forecast earnings. This low P/E ratio is the reason why the dividend yield is so high.
Both of these measures suggest to me that Taylor Wimpey shares could offer value at current levels.
There’s obviously still a risk that UK economic conditions will get so bad that they trigger a housing crash. But if house prices and demand stay reasonably stable, I think Taylor Wimpey could be a good buy for my portfolio at current levels.
Will I buy the stock? I want to research some rival housebuilders in more depth before I make a final decision. But Taylor Wimpey shares are definitely on my short list.
