As the FTSE 100 slides, investors have a brilliant opportunity to generate a sky-high second income from top UK stocks such as housebuilder Taylor Wimpey (LSE: TW). Yet today’s dividends comes with risks attached.
Life is tough for UK housebuilders as the nation faces a mortgage crunch, yet Taylor Wimpey’s shares have held up better than most, falling a relatively modest 7.72% over the last year.
Others are finding today’s troubled environment much tougher. Persimmon shares have crashed 45% over 12 months, with Vistry Group down 21% and Crest Nicholson Holdings plunging just over 24%.
This suggests to me that Taylor Wimpey offers investors much greater resilience as a property crash threatens. House prices fell 2.6% in the year to June, according to latest Halifax figures, but future falls are likely to be more substantial as fixed-rate mortgages expire and borrowers face markedly higher interest rates.
Falling house prices will have a knock-on effect on builders, hitting demand and revenues. Yet this is largely priced in to today’s valuations, with Taylor Wimpey trading at just 5.3 times earnings.
That’s a big dividend
April’s full-year guidance looks optimistic as mortgage rates rise higher than anyone expected at the time. Taylor Wimpey cut its total order book value from £3.3bn to £2.38bn, but the damage could end up being worse.
Taylor Wimpey has also had to deal with the surging cost of materials and labour costs, which will further squeeze margins. Much depends on inflation. When it peaks, sentiment could swiftly turn and I can see a tempting opportunity here.
In 2022, the company paid dividends totalling 9.4p per share. If I bought 19,148 shares, based on that payout, it would give me a second income of £150 a month.
At today’s price of 100p a share, that would cost me £19,148. Basically, that’s my entire Stocks and Shares ISA allowance gone on one stock. The maximum I can afford to invest in any single company is £5,000, which would give me income of £37.50 a month or £450 a year. That still isn’t bad.
How safe is the dividend? Taylor Wimpey is still forecast to yield a thumping 9.32% in 2023 and 9.33% in 2024, so analysts are optimistic it will survive. The company has only £88.5m of debt but holds £952.3m in cash. The debt-to-equity ratio is just 2%. Like I said, it looks resilient.
Risky but potentially rewarding
So far, CEO Jennie Daly is sticking to its policy of paying 7.5% of net assets, or at least £250m, of dividends annually “throughout the cycle”. The firm is also less dependent on Help to Buy than many, as it accounts for just 12% of sales (and falling).
Taylor Wimpey’s focus on more solid parts of the housing market in the south east and London offers protection. It reckons it can cope with a house price drop of up to 20%, at the extreme end of current predictions.
None of this comes with guarantees, but I’m now gearing up to add Taylor Wimpey shares to my portfolio this summer. Today’s low valuation and high second income stream looks irresistible, but only for investors willing to take a long-term view as I expect a lot of volatility along the way.
