Shares in Taylor Wimpey (LSE:TW) currently come with a dividend yield of just under 7%. I think that’s well worth considering for investors looking to earn passive income.
The FTSE 100’s closing in on the 8,000 mark, but Taylor Wimpey shares are still recovering from an 8% fall at the end of February. That looks like an opportunity to me.
The big risk
The reason for the sharp decline is the news the Competition and Markets Authority (CMA) is investigating UK housebuilders. Taylor Wimpey is one of the companies named in the investigation.
The CMA is concerned the firms involved might have been sharing information that ought to have been kept private to maintain competition. Exactly what they might find is impossible to guess.
For Taylor Wimpey, there are two possible outcomes. One is the CMA finds nothing and business carries on as normal and the other is something untoward comes to light.
If it’s the latter, then it’s unclear what the outcome might be. And this uncertainty is why the stock’s lower today than at the start of the year.
Passive income
If Taylor Wimpey makes it through the CMA’s investigation unscathed, this could be a great time to buy the stock. To start with, there’s a 6.8% dividend, which is more robust than it might seem.
The firm’s policy of distributing a percentage of its assets – rather than its free cash – makes the dividend more robust. With builders cutting back volumes to protect margins, that’s important now.
Obviously, the company can’t pay out more cash than the company brings in indefinitely. But with the UK’s construction output starting to increase again, I don’t see this as likely.
Furthermore, a long-term need for housing in the UK means any downturn ought to be temporary. So I think Taylor Wimpey shares have the potential to be a reliable source of long-term passive income.
Cash generation
One of the most impressive things about Taylor Wimpey is the company’s cash generation. In an industry that can be capital-intensive, the business earns surprisingly good returns.
The problem with housebuilding is that constantly buying land’s expensive. That can use up a company’s capital, meaning the cash it generates isn’t available to shareholders.
Taylor Wimpey however, uses just 5% of the cash it generates from its operations to reinvest. And despite this, it has one of the largest landbanks in the industry.
What’s even more impressive is that this isn’t due to an extensive use of debt – as is the case with some of the US housebuilders. The company’s balance sheet looks strong.
A long-term investment
Over the long term, I think demand for housing in the UK is likely to be strong. Ultimately, people have to live somewhere and that means more houses will need to be built.
With interest rates set to fall, I’d expect things to pick up for the industry. That means dividend investors looking at this stock might want to consider making a move sooner rather than later.
