I love a stock with a high yield, provided it’s sustainable. Thanks to the recent sell-off, there are plenty on the FTSE 100 today.
Right now, everybody is worrying about the next stock market crash but I’m looking ahead to the next bull market. It will come, given time. History shows us that. I don’t know when, but I want to be ready for it. I’m preparing by loading up on dirt cheap, high-income stocks today.
An eye-catching 8% yield
Housebuilder Taylor Wimpey (LSE: TW) has caught my eye, primarily because of its magnificent 8.1% yield. If I reinvested all of my payouts back into the stock I could double my money within nine years, even if the share price didn’t rise at all.
If management progressively hikes the dividend each year, I’ll double my money even sooner than that, with any capital growth on top.
The big risk is that the dividend is cut. It’s a particular concern today, with latest Land Registry figures showing prices fell 1.1% in January.
I’ve been rummaging through Taylor Wimpey’s 2022 results to see what it has to say on the subject. Chief executive Jennie Daly said it has “a high-quality, well located landbank and a strong financial position” that underpins its dividend policy of paying out 7.5% of net assets, or at least £250m, a year.
Taylor Wimpey increased its ordinary dividend per share from 8.58p to 9.4p last year, an encouraging rise of 9.6% on 2021. The group was “highly cash generative” with year-end net cash of £863.8m, up from £837m in 2021. And that was after returning £473.8m to investors via dividends and share buybacks.
This beat expectations but what really matters is whether it can sustain this performance as house prices wobble.
Dividend can survive a house price crash
Management said its dividend policy has been “stress tested to withstand conditions beyond what we would consider a normal downturn”. This includes a fall in house prices of up to 20% and a 30% decline in volumes.
Japanese bank Nomura reckons UK house prices will fall 20% this year, but most predictions anticipate smaller falls. I’m waiting to see what impact the banking crisis has. It could blow the housing market’s foundations away. Alternatively, it could help, by capping the interest rate hike cycle sooner than expected.
Taylor Wimpey has warned that completions are likely to fall this year, and affordability concerns remain, especially for first-time buyers. Yet with the stock trading at just 6.2 times earnings, having fallen 18.34% in the last year, much of this worry looks priced in.
Today’s yield is nicely covered twice by earnings. The forecast yield is slightly lower at 7.5%, with cover notably thinner at 1.1. Dividends are never guaranteed, and if the next year is even tougher than expected, this one could come under pressure.
Yet I think things would have to be pretty bad for the dividend to be abandoned altogether. With luck, Taylor Wimpey shares and dividend will weather the downturn, and thrive when that bull market arrives. I’ve just bought M&G and Legal & General Group and Unilever are next on my buy list. After that, I’m lining up Taylor Wimpey. Hopefully I’ll scrape together the cash to buy it before next stock market rebound.
