Taylor Wimpey (LSE: TW) shares are quite popular within the UK investment community. It seems investors like the big yield on offer from the FTSE 100 housebuilder.
Have the shares actually been a good overall investment recently though? Let’s take a look at how much money I’d have today if I’d invested £5,000 in the stock a year ago.
Taylor Wimpey shares have fallen
On 1 November 2021, Taylor Wimpey’s share price ended the day at 151p (I’ll use this figure as my starting share price). However today, the stock is trading at 94p – 38% lower.
This means if I had put £5,000 into the stock 12 months ago, my capital would now be worth about £3,110 (ignoring all trading commissions). That’s not a good result.
Of course, we also need to factor in the big dividends here. If I’d bought the stock a year ago, I would have received one dividend payment of 4.44p per share in May. And I’d be entitled to another dividend payment of 4.62p per share, which is set to be paid out on 18 November. Assuming I took these in cash and didn’t reinvest them, these dividends would be worth about £300.
Putting the original investment and the dividends together, the total comes to around £3,410. So, overall, I’d be down a little over 30% on my original £5k investment.
That’s a disappointing result. To put it in perspective, if I’d invested my £5,000 in a basic FTSE 100 tracker fund, I’d now have about £5,040.
Lessons from the share price fall
I think there are a couple of takeaways from these calculations. One is that housebuilder stocks can be very volatile due to their cyclical nature.
House building is a boom and bust industry. As a result, investors will flee the sector if there’s a hint of an economic downturn. This can push share prices across the sector down significantly. So portfolio diversification is very important when investing in these stocks.
If I owned a bunch of housebuilder stocks, I’d diversify into other more ‘defensive’ sectors such as consumer staples and healthcare for portfolio protection.
Another takeaway here is that it’s not wise to buy a stock just because it offers a high yield. When investing in stocks for income, it’s a good idea to think about the total returns (capital gains and dividends) a stock can provide.
There’s not much point in picking up a 7% yield from a stock if it has the potential to lose 30% of its value, or more, in the blink of an eye. It’s going to take many years of dividends to make up for that kind of capital loss.
I learned this last lesson the hard way. So now, when I invest in dividend stocks, I tend to go for more stable, defensive companies such as Unilever and Reckitt. These stocks don’t offer high yields like the housebuilders do. However, they also don’t experience the kind of wild share price volatility that housebuilders do.
