Taylor Wimpey (LSE: TW.) shares sport an enormous dividend yield right now. With analysts forecasting a payout of 9.2p per share for 2025, the prospective yield is around 9%.
Is this a gift for income investors? Or is this a case of ‘if it looks too good to be true then it probably is’? Let’s discuss.
Housebuilders as investments
In theory, this stock has a lot going for it. The UK has a housing crisis and so in the long run, demand for Taylor Wimpey’s houses should be high.
In reality though, it’s far more complicated than this. Today, housebuilders like Taylor Wimpey are facing all kinds of challenges, from buyers struggling with affordability due to high interest rates to significantly higher costs for staff and materials.
These challenges are reflected in the share price. Over the last year, the stock has fallen around 160p to 106p – a decline of more than 30%.
So, before buying the shares, one really needs to think carefully about operating conditions for UK housebuilders. Are things likely to get better from here or could they get worse, sending the share price down further (and offsetting any gains from dividend income)?
It’s worth noting that a trading update posted recently wasn’t exactly strong. In the nine weeks to 28 September, Taylor Wimpey’s net private sales rate was 0.65 per outlet (active sales site) per week, compared to 0.70 per week in the same period a year earlier.
Is the dividend secure?
Zooming in on the dividend, Taylor Wimpey has said it’s confident in its capital allocation policy and that it can pay reliable dividends.
However, I certainly wouldn’t rely on the current forecast of 9.2p per share for 2025. Because right now, dividend coverage (the ratio of earnings per share to dividends per share) is very low at 0.90.
This signals that earnings are unlikely to cover dividends this year. And it means that a cut is a possibility.
Note that housebuilders are renowned for cutting their dividends when the operating environment is challenging. Taylor Wimpey has done it itself on several occasions over the last few decades and there have been quite a few years where it paid no dividends at all.
Put all this together, and I think the shares need to be approached with caution. They could end up being a great passive income investment but the risks are relatively high.
Other passive income options
The good news is that there are plenty of other high yielders on the London Stock Exchange to consider. Some names worth checking out include Legal & General, Phoenix Group, MNG, and Primary Health Properties.
Personally, I think savings and investment company MNG is definitely worth considering if one is looking for income. It sports a yield of about 8.2% and dividend coverage is forecast to be about 1.3 times this year.
Of course, it has its own risks. A major downturn in the financial markets is one.
In the long run, though, I see quite a bit of potential.
