Stocks and shares can be a great source of passive income. And there’s a FTSE 100 stock with an 8.5% dividend yield that I think looks like a great opportunity at today’s prices.
Sometimes a high yield can be a sign that the dividend is at risk of being cut. But in the case of housebuilder Taylor Wimpey (LSE:TW), I think this is less likely than many investors are imagining.
UK housebuilders
UK housebuilders have been facing a number of headwinds lately. Rising interest rates and the end of the Help-to-Buy scheme have been weighing on demand while inflation and cladding issues have increased costs.
It’s therefore not a big surprise to see that most builders have been either lowering their dividends (Barratt, Persimmon, Redrow, Vistry) or holding them steady (Bellway, Crest Nicholson). Most, but not all.
One that has increased its dividend this year is Berkeley Group. But the company’s 128.74p dividend for this year is still below the 380.13p it paid out to shareholders in 2021.
By contrast, Taylor Wimpey’s dividend for 2023 looks like it’s going to be at its highest level since the Covid-19 pandemic. So how is the company doing it?
Dividend policy
Unlike other housebuilders, Taylor Wimpey’s approach to shareholder distributions is based on the value of its assets, rather than its earnings. The company’s policy is to pay out 7.5% of its net assets as dividends.
This means the firm can continue to increase its dividends to shareholders even when profits falter in a cyclical downturn. That’s why I think the stock could be a great investment for passive income in a recession.
The risk with this approach is that it’s unsustainable over the long term. A company pays out more than it brings in on an indefinite basis will go bankrupt sooner or later.
But I don’t think Taylor Wimpey’s plan is to pay out more than it brings in on an indefinite basis. I think this is a short-term feature during the downturn.
When the UK property market recovers – as I suspect it will sooner or later – I expect the company’s earnings will cover its dividend again. So I don’t think long-term risk is likely to materialise.
A stock to buy?
Ultimately, I think that investors looking for a passive income investment could do a lot worse than Taylor Wimpey. The stock is pricing in the expectation of a dividend cut, but it’s not obvious to me that this will happen.
A significant drop in the value of its assets might cause the company to lower its dividend. But unlike other housebuilders, an economic downturn doesn’t automatically mean a cut for shareholders.
That’s why I think the 8.5% yield on the company’s shares is attractive. I’m expecting the UK housing market to recover over the medium term and I think taylor Wimpey will be well-positioned when it does.
