A bull market is coming and I want to buy this high-yield stock while it’s still cheap

This FTSE 100 stock will pay me a high yield while I wait for today’s volatility to pass and the next stock market recovery to kick in.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Silhouette of a bull standing on top of a landscape with the sun setting behind it

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones 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.

More on Investing Articles

Investing Articles

9.4%+ yields! 3 proven FTSE 100 dividend payers I’d buy for my Stocks and Shares ISA

Our writer highlights a trio of FTSE 100 shares with yields close to 10%. He'd happily pop them into his…

Read more »

Mixed-race female couple enjoying themselves on a walk
Investing Articles

Are Raspberry Pi shares a once-in-a-lifetime chance to get rich?

With Raspberry Pi shares surging after a successful IPO, could this UK tech startup offer a long-term wealth creation opportunity…

Read more »

Newspaper and direction sign with investment options
Investing Articles

Huge gains and 9% yields: why now’s an amazing time to be a stock market investor

The stock market’s generating fantastic returns in 2024. Whether you're looking for gains or income, it’s a great time to…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

This steady dividend payer looks like one of the best bargain stocks in the FTSE 100

A yield of 4.7% and a consistent dividend record make this FTSE 100 company look like good value in an…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

£9,000 in savings? That could become passive income of £19,175 a year

It's possible to invest affordable sums of money into building a big passive income stream. Here's how I'd go about…

Read more »

Black father and two young daughters dancing at home
Investing Articles

Legal & General shares: a once-in-a-decade passive income opportunity?

Is a dividend yield at its highest level in a decade, combined with a strong record of increasing payouts, a…

Read more »

Investing Articles

With a 7% yield and 4.1 P/E, is this the best passive income stock on the FTSE 350?

Millions of Britons invest for a passive income. While our writer isn't buying this stock yet, he believes it's worth…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

This amazing FTSE 250 has a 8.8% dividend yield and trades at just 4x forward earnings!

Our Foolish writer believes this FTSE 250 stock is worth keeping a very close eye on. However, he's not keen…

Read more »