The London Stock Exchange is filled with countless passive income opportunities. And even after delivering some spectacular returns in 2024, there are still plenty of high-yielding shares for investors to capitalise on.
That includes homebuilders like Taylor Wimpey (LSE:TW.) who are expected to benefit from the government’s push to build another 1.5 million new homes over the next five years.
In fact right now, the stock offers a solid 7.3% yield. With dividends over the last 12 months totalling 9.59p, buying 10,428 shares for roughly £13,660 would instantly unlock a £1,000 passive income stream today.
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But this could be just the tip of the iceberg since management has been hiking payouts for the last four years.
In other words, this income stream could be set to grow. However, if the business were to start underperforming, these dividends could just as easily get cut. So which is it? And is Taylor Wimpey a good investment today?
The bull case
I’ve already highlighted the growth catalyst of a supportive government. With the planning process becoming simplified, the regulatory conditions are shifting in Taylor Wimpey’s favour. After all, the changes make it far easier for the company to convert its impressive landbank into new homes to sell.
At the same time, the Bank of England is busy cutting interest rates. That means while more homes are becoming available, mortgages are also becoming more affordable. And when paired with a steadily recovering economy, demand and supply are both moving in the right direction right now.
As for the group’s balance sheet, it’s stronger than most of its peers. Looking at one of its closest competitors – Persimmon – Taylor Wimpey has almost double the cash and 40% more inventory to work with.
In fact, this strong financial position is how management’s maintaining its dividend policy of returning 7.5% of net assets to shareholders each year while rivals have had to change course.
The bear case
There’s a lot to like about Taylor Wimpey. However, it’s far from a risk-free enterprise. With passive income being a leading factor behind its popularity, I have some concerns surrounding its dividend. In 2023, the company didn’t actually generate enough excess cash flow to cover the cost of shareholder payouts. As such, management had to dip into its cash reserves.
As of June, the homebuilder’s net assets stood at just over £4.4bn, which translates into an expected dividend expense of £332.3m. So unless cash from operations suddenly makes a comeback (unlikely in 2024, given it only generated £32m across the first half of the year), management will once again have to dip into cash reserves to avoid a dividend cut.
To be fair, with £669m of cash & equivalents to work with, there’s some flexibility to maintain dividends in the short term. But in the long term, this isn’t sustainable.
The bottom line
Taylor Wimpey needs the housing market and, in turn, cash profits to improve to avoid a dividend cut. The problem is it’s impossible to know when the current downturn in real estate is going to end. And continued lacklustre activity doesn’t bode well for Taylor Wimpey’s passive income potential.
This isn’t a risk I’m willing to take for my portfolio. That’s why I’ll be looking elsewhere to unlock a dividend income.
