It’s hard not to be interested in an 8.97% dividend yield. But with anomalies like this, you always have to ask what’s going on behind the scenes?
Taylor Wimpey‘s (LSE:TW) a great example. The stock stands out in an industry known for high dividend yields – but that’s not necessarily a good thing.
Passive income
A lot of UK housebuilders have dividend yields above the FTSE 100‘s 3.35% average. But Taylor Wimpey really is something else.
| Stock | Dividend Yield |
|---|---|
| Barratt Redrow | 6.43% |
| Bellway | 3.59% |
| Persimmon | 5.24% |
| Taylor Wimpey | 8.97% |
It’s also been the most consistent. Barratt Redrow, Bellway, and Persimmon have all cut their dividends in the last few years. From a passive income perspective, that’s pretty attractive. But investors have to ask what’s going on?
Does the company have a magic money tree, or is there something else we need to know? That’s the big question.
Where’s the money coming from?
In a 2023 interview, Charlie Munger said the following about Warren Buffett’s investments in the Japanese trading houses:“‘It was like having God just opening up a chest and pouring money into it. It’s awfully easy money.“
Taylor Wimpey’s high and apparently sustainable dividend might look like this. But the reality’s a bit different. The high yield and the consistency come from the firm’s unique dividend policy. It returns cash based on its assets, not its free cash flow.
That means much greater stability in downturns when profits are low. But it does come at a cost for shareholders.
What’s the catch?
Imagine having a savings account with £10,000 that pays 3% AER interest. You have to decide how much to take out each month as income. One option is you can take out the interest. In that situation, you’ll get £24.66 a month.
Alternatively, you could withdraw a fixed percentage of the balance. Suppose you decide on 5%, for example. That way, you get £51.23, which is obviously more. But you don’t make more money — your account balance just goes down.
The situation’s the same with Taylor Wimpey. Investors get more income, but it comes out of the business they own.
So what?
No company has a magic money tree. In Taylor Wimpey’s case, the effects of its dividend policy have been showing up elsewhere. If you take out more money from a savings account than you make in interest, your balance goes down. And if a firm pays out more than it brings in, its book value goes down.
That’s what has been happening with Taylor Wimpey. And it’s why the share price is down 54% in the last five years.
That means investors have ultimately gone nowhere on a total return basis. And this is the catch with the high dividend yield.
None of this makes Taylor Wimpey any worse than the other UK housebuilders. But it does provide some important context.
An important change
Taylor Wimpey’s making a change to its capital allocation policy. It’s moving to a mix of dividends and share buybacks. With the share price down, I think that makes a lot of sense. It could help make the high yield much more sustainable in future.
Taylor Wimpey’s a stock I keep on my radar. But it’s not my preferred name in the housebuilding sector at the moment.
