Despite their popularity, American stocks currently look expensive to me. The S&P 500 index trades on 25.2 times trailing earnings, close to the top of its valuation range. Also, its dividend yield is 1.2% a year, close to historic lows. Meanwhile, the UK’s FTSE 100 index trades on 14.1 times earnings and offers a passive income of 3.4% a year. That does look attractive to me.
Delicious dividends
As a value investor, I like buying shares in good companies at fair prices. Also, I love earning dividends — regular cash payouts made by some companies to their shareholders.
However, future dividends are not guaranteed, so they can be cut or cancelled at short notice. Also, most London-listed companies don’t pay out this passive income. Some firms are loss-making, while others reinvest profits into future growth.
That said, members of the FTSE 100 are predicted to deliver a whopping £80.4bn in dividends in 2025. That’s roughly 2% up on 2024’s total, but 5.6% below 2018’s record payout of £85.2bn.
In addition, analysts expect Footsie firms to buy back over £39bn of their own shares this year. This means that around 1.7% of the index’s total share base (worth over £2.2trn) will be retired in 2025. This smaller base means future dividends will be distributed among fewer shares, boosting dividend income per share.
Powerful passive income
In order to claim some of this cash mountain, my family portfolio invests in various global and UK tracker funds. These low-fee collective investments automatically collect dividends for us. This broad and basic strategy can work for pretty much anyone and is often recommended by investment professionals.
However, in order to bag even more unearned income, we also buy individual FTSE 100 and FTSE 250 shares for their enhanced cash returns. Right now, we own over 20 different FTSE 350 stocks with above-average dividend yields, but I’m always looking for more.
Taylor-made for me?
For example, take the shares of Taylor Wimpey (LSE: TW), which deliver one of the highest cash yields in the London market. This British housebuilder was created in July 2007 from the merger of former rivals Taylor Woodrow and George Wimpey (whose origins date back to 1921 and 1880, respectively).
As I write, Taylor Wimpey stock trades at 93.14p, valuing this construction group at £3.4bn — among the FTSE 100’s smaller businesses. At this level, the shares offer a market-beating dividend yield of 10% a year, a milestone sometimes associated with distressed stocks.
Over the past year, the shares have plunged from a 12-month high of 169.15p on 20 September 2024 to their low of 92.5p as I write on 2 September. This leaves the stock down 42.7% over one year and 18.9% lower over five years (excluding dividends). To me, this puts Taylor Wimpey deep into bargain-bin territory — but could it be another value trap?
Looking deeper, the firm cut its dividend in 2019 and 2024, so its directors are not averse to trimming this payout. Even so, it rose from 8.58p a share for 2021 to 9.46p in 2024, a 10.3% uplift. Fool rules prevent me buying this stock this week, but I intend to buy into Taylor Wimpey this month for its hefty passive income this month!
