The Motley Fool

Why Taylor Wimpey plc isn’t the only cheap dividend stock that could help you retire early

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Models of houses on top of pound coins
Image source: Getty Images.

When Taylor Wimpey (LSE: TW) published its full-year results earlier this week, the housebuilder confirmed that “low interest rates” and the ‘Help to Buy’ scheme are continuing to stimulate demand.

The figures for last year were fairly strong. Sales rose by 7.9% to £3,965.2m, completions were 4.6% higher at 14,842, and adjusted operating profit climbed 10% to £841.2m. So why did the shares fall by around 5% after these figures were released?

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Profits could peak

One risk is that housebuilders’ profit margins may have peaked. Taylor Wimpey expects operating costs to rise by 3-4% this year. This happened in 2017 too, but the company was able to offset higher costs by increasing average selling prices by 3.5% as well.

If house prices deliver a flatter performance in 2018, as some experts expect, then margins could fall slightly.

That’s certainly a risk, but I think it’s worth remembering that the group generated an adjusted operating margin of 21.2% last year. That’s pretty high and was enough to lift net cash by 40% to £511.8m during the period.

More of the same, please

I believe that if Taylor Wimpey can continue cranking out houses with an operating margin of about 20%, shareholders should continue to do well.

The group’s policy of returning surplus cash to shareholders means that its ordinary and special dividends for 2017 totalled 13.94p per share, giving a trailing yield of 7.5%. A payout of 15.2p per share is forecast for this year, indicating an 8.2% yield.

These payouts are likely to fall if the housing market heads south. But the outlook for the next few years seems reasonably stable. I think Taylor Wimpey remains worth considering for dividend investors.

A dividend stock I’d buy today

Over the last year, bus and train operator National Express Group (LSE: NEX) has been a standout performer in its sector, trading broadly flat while some rivals have lost 20-30% of their value.

Today’ results provide some clues as to why the group has been able to avoid this fate. Revenue rose by 6.1% to £2.32bn last year, while operating profit climbed 7.7% to £197.9m. Earnings per share were 11.7% higher at 25.7p.

That’s a fairly creditable performance. One reason for these gains was that National Express doesn’t operate any UK rail services. Its domestic operations are restricted to bus and coach services, both of which tend to be more profitable than rail and less at risk from political interference.

A second attraction is that more than most rivals, National Express has diversified overseas. It operates bus services in North America, Spain and Morocco and rail services in Germany. In total, more than 80% of operating profit comes from outside the UK.

A cash machine

The group’s operations generated an operating margin of 8.5% last year and free cash flow of £146.4m. The board is recommending a 10% dividend increase, taking the total payout to 13.51p. My calculations suggest that this should be covered twice by free cash flow, making it affordable and suggesting that there’s still room for further growth.

The shares now trade with a forecast P/E of 11.2 and a price to free cash flow ratio of about 12. These figures look affordable to me and should provide good support for this year’s forecast dividend yield of 4.2%. I’d rate this stock as an income buy.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.