Mortgage rate volatility has been rocking the housing market. Consequently, UK housebuilder Taylor Wimpey (LSE:TW) has seen its share price whip up and down this summer. But for income investors drawn to its juicy 7.8% dividend, this high-yield stock could be a great buy right now.
Good foundations
Taylor Wimpey’s latest results beat expectations across the board. Despite the downturn in the housing market, which saw some eye-watering numbers, the housebuilder still showed resilience. The company even raised its interim dividend by 4%, delivering a delicious payout of 4.79p.
Perhaps more encouragingly, upgraded guidance for UK home completions this year indicates it can stomach current conditions. This is due to its more affluent customer base being less affected by rate hikes. As such, profits can remain robust and allow it to continue paying its high dividends.
Investors could also take comfort from expectations for lowering build cost inflation, which should ease some pressure on the firm’s bottom line. However, it’s still worth noting that risks linger as the housing market’s near-term outlook remains heavily reliant on volatile inflation data.
Strong dividends
So, what makes Taylor Wimpey’s dividend yield so appetising then? Well, it’s the unique dividend policy management has chosen to adopt in promising shareholders at least 7.5% of net assets annually. This is unlike its other FTSE competitors, which have dividend policies that are earnings-based instead.
On that basis, when Taylor Wimpey’s earnings do eventually rebound, future payouts could grow even more generously. Currently, analysts are projected dividends to grow to 8% in 2024. This could potentially rise to higher levels over the next decade.
This is also made possible because management spends its capital wisely. It selectively acquires quality land in prime locations. This ends up boosting profitability while leaving more cash available for those dividends.
Stable demand from affluent, resilient buyers also means lower inventory as well. Of course, risks are still present if the housing slump worsens. But I feel Taylor Wimpey is better positioned than its peers to ride out the storm given the lower loan-to-value ratios its customers hold.
Buy for income?
Looking further out, the long-term hunger for housing suggests better times ahead. Demographics and undersupply indicate home demand should recover strongly once rates stabilise and drop. This would inevitably reignite the appetite for Taylor Wimpey shares.
As margins rebound, the firm’s dividend policy ensures shareholders will be well fed as they continue to reap the benefits of a stable and generous dividend.
Economic uncertainty has left a bitter aftertaste for some investors lately. But periods of fear and volatility can serve up opportunities to snap up the stock at a discount too. Rather than attempting to time the market, I feel investors should take a longer-term view.
There’s no doubt that the path forward is unclear. Nonetheless, the group boasts an experienced team with solid financials. For investors focused on income today, Taylor Wimpey’s chunky yield looks like an appetising meal.
