Does an 8.5% dividend yield make Taylor Wimpey shares the FTSE 100’s best buy?

There might still be a few bumps in the road ahead, but here’s why Taylor Wimpey shares look like a top long-term income buy to me.

| 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.

Happy parents playing with little kids riding in box

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.

sdf

We might be in a property slump, but Taylor Wimpey (LSE: TW.) shares have been climbing since June.

We’re still looking at a fall in the past five years. But I think the omens could be coming together for a new bull run.

Property prices

Taylor Wimpey has been hit by two things. One is the property market slump resulting from soaring interest rates. The other is a rise in costs due to general inflation.

And it can be hard to pass on those costs to customers when fewer of them can afford to take on mortgages. But isn’t this all a short-term thing?

Well, so far in 2023, things do look tough. The first half brought a 21% fall in revenue. And profit before tax dropped by 29%.

But what I think concerns me most is that Taylor Wimpey’s operating margin took a hammering. It fell from 21% at the end of 2022, to just 14%. By the time that squeeze makes it down to the adjusted earnings per share line, we see a 44% drop.

Dividends

Still, what counts most for me is dividends, and I’m talking about long-term income.

Unusually, Taylor Wimpey’s policy is to pay 7.5% of net assets each year as ordinary dividends. It’s not a proportion of earnings, which could have seen the 2023 payout slashed.

No, the board actually lifted the H1 dividend slightly, by 3.7%. That’s based on its view that full-year completions should be near the top end of forecasts.

And, with the share price so low, the forecast dividend yield for the full year is now up at a whopping 8.5%.

Pressure

According to both Halifax and Nationwide, the 2023 property price fall is the biggest since 2009. Still, we don’t see falls very often. And if prices rise for 13 out of every 15 years, I rate that a long-term win.

Still, we’re not out of the short-term pain yet, and I can see pressure on the dividend. Some experts think inflation and interest rates won’t fully cool until well into 2024, and house prices won’t get back on track until the end of that year.

They might be right. And for Taylor Wimpey to maintain the same dividend level in 2024 could be a tough task.

Net cash held up well enough in the first half of 2023. But the board reckons that by the end of this year, the figure could be around a third lower than December 2022.

Long term

So, more short-term pain for shareholders? Yes, I think there could be.

But, even if it halves in 2024, the Taylor Wimpey dividend yield would still come in around the FTSE 100 average. If the share price doesn’t move, that is.

And looking to the long term, by which I mean a decade or more, I think I see one of the best dividend prospects in the whole of the Footsie here.

Will I buy? Well, I already hold housebuilder shares. But for my next buy, I might just double up with some Taylor Wimpey.

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.

Alan Oscroft 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

DIVIDEND YIELD text written on a notebook with chart
Investing Articles

How much passive income can Legal & General shares generate over 10 years?

Legal & General shares offer very sizeable dividend payouts. Dr James Fox takes a closer look at the dividend forecast…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

How to build a Stocks and Shares ISA for the AI era

Artificial intelligence is likely to create a lot of opportunities for investors in the years ahead. So now could be…

Read more »

Mature black woman at home texting on her cell phone while sitting on the couch
Investing For Beginners

I asked ChatGPT for the best bargain in the FTSE 100 and it got it horribly wrong

Jon Smith disagrees with the pick from ChatGPT when it comes to bargain FTSE 100 shares and counters the points…

Read more »

DIVIDEND YIELD text written on a notebook with chart
Investing Articles

With a 9% dividend yield, WPP is now topping the FTSE 100 – but I’m not convinced

Our writer breaks down how to spot a dividend yield that’s backed by sustainable earnings growth – and one that…

Read more »

Santa Clara offices of NVIDIA
Investing Articles

Nvidia stock: is $200 in 2025 now looking like a real possibility?

Nvidia stock has jumped from $100 to $165 in the blink of an eye. And Edward Sheldon believes that $200…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Passive income for Millennials: 3 UK investment ideas

More and more people aged between 29 and 44 are turning to the stock market in search of passive income.…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Investors could target £6,531 in annual dividend income from £11,000 in this FTSE 100 financial giant. It looks very undervalued too!

This FTSE 100 firm has delivered very high dividends in recent years, which analysts predict are set to go even…

Read more »

Exterior of BT Group head office - One Braham, London
Investing Articles

Should I add to my BT holding now, with the share price near a 12-month high?

BT’s share price has risen a long way from this year’s traded low, but this doesn't necessarily mean it's overvalued.…

Read more »