With an 8.5% dividend, is the Taylor Wimpey share price set to surge?

The Taylor Wimpey share price is recovering, but the dividend yield is still massive. I’m looking at locking in some passive income here.

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Things have started to look a bit better for the UK’s housebuilders, as prices rose a little in October. And the Taylor Wimpey (LSE: TW.) share price just got a boost from a 9 November update.

The shares are only up a couple of percent at the time of writing. But the firm has upped its full-year guidance. And I think that could feed through to future gains.

We’ve still seen a five-year share price drop of 30%. But does that give us a nice long-term potential buy now, before it picks up too much more?

Mortgage costs

The main drag on Taylor Wimpey, and the FTSE 100‘s other builders right now, is the high cost of mortgages. And the firm recognised that, reporting weak buyer confidence.

Still, CEO Jennie Daly did speak of “a resilient performance in what continues to be a challenging market backdrop,” with a “robust sales rate and strong financial position.”

Taylor Wimpey still expects to complete 10,000 to 10,500 homes by the end of the year. And the board has lifted its operating profit guidance, which is a nice boost.

We should now see something at the top end of the previous £440m to £470m guidance.

The dividend

When I look at Taylor Wimpey, my eyes keep landing on that dividend. A forecast yield of 8.5% is huge, but is the cash there to pay it?

I mean, it would be enough to turn every £1,000 invested today into £2,200 in 10 years. So, it could be a great buy for long-term passive income. I can’t see a Cash ISA matching it, that’s for sure.

But can it deliver? That’s the big question. The big City folks seem unsure.

If cost inflation goes on for much longer, and sales prices stay weak, I could see the purse being squeezed a bit. And that could mean a cash cut.

I still like it

It does look like interest rates could stay ‘higher for longer’ (and that’s a 2023 phrase I’d love to get past).

Still, I believe I see long-term optimism here. The Taylor Wimpey share price is up nearly 20% since the summer’s lows. And that has to reflect the UK’s demand for homes.

The rise has lifted the forecast price-to-earnings (P/E) ratio to around 12. It’s perhaps not screaming ‘cheap’, but it should drop in the next few years.

Cash cow

It looks like good value to me. What was it billionaire investor Warren Buffett said? Ah yes: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Buffett likes to buy top stocks when their prices are low, and hold for the long term. And I try to do the same.

So yes, there’s risk here. And we could see darker days for the Taylor Wimpey share price before things brighten. Especially if the dividend is shaved.

But I just might buy some Taylor Wimpey shares to add to my Persimmon holding.

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 positions in Persimmon Plc. 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.

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