Taylor Wimpey (LSE:TW) is one of the few high-yield dividend stocks that I think passive income investors should consider. But the share price dived yesterday (9 October) for no apparent reason.
At first sight, it’s hard to see why – there hasn’t been an update from the firm and analyst ratings are unchanged. But there is a reason and it’s one dividend investors should be familiar with.
What happened
At the end of Wednesday Taylor Wimpey’s share price was 105.2p. But the stock dropped overnight, opening yesterday at 100.6p.
The fact the stock fell 4.6p gives investors a big clue as to what’s been going on. That’s quite a specific number that points in a particular direction.
The reason Taylor Wimpey shares traded down is the shares went ex-dividend. In other words, investors who bought after yesterday’s open don’t receive the next distribution.
The value of that dividend is 4.67p – almost exactly the amount the share price fell by. And this illustrates something that all good dividend investors are aware of.
Ex-dividend
An obvious dividend strategy is to buy shares just before their ex-dividend date and then sell them after. This sounds like a way of generating steady passive income, but it’s a really bad strategy.
Yesterday’s move in Taylor Wimpey shares illustrates why this is. Shares are naturally worth less after their ex-dividend date and the stock market is generally smart enough to figure this out.
Investors who bought shares on Wednesday get a 4.67p dividend next month and those who buy it after don’t. So the stock is clearly worth less on Thursday than it was the day before.
This is true across the board and the stock market usually knows it. So investors who buy and sell dividend shares like this are likely to lose in selling prices what they might gain in dividends.
Future dividends
Taylor Wimpey pays its dividend based on its asset base, rather than its net income or free cash flows. That makes it relatively resilient in a downturn, but there is a cost to it.
Other things being equal, for the stock to be worth what it was on Wednesday, the firm needs to generate 4.67p per share. And there are a couple of ways this might happen.
One is by the value of its assets increasing naturally. The other is through making more money by selling houses – the company’s core business operations.
Unless this happens, there’s no reason to expect the share price to get back to where it was. Having taken 4.67p per share out of the business, the stock is worth that amount less than it was before.
UK housing
Ultimately, the case for buying Taylor Wimpey shares comes down to the company’s ability to generate cash faster than it returns it to shareholders. And there are reasons for optimism.
Despite some recent challenges, the UK has a shortage of housing that should be a long-term positive. I think that makes the stock worth considering, but there are other housebuilders I like more. The dip in the price this week does nothing to change my mind.
