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Forget a buy-to-let! Taylor Wimpey is a FTSE 100 stock with a 9% dividend yield

With the FTSE 100 yielding 4% at present, its income return is relatively high. Certainly, it may be possible to achieve a higher income return from a buy-to-let property. But once costs such as wear and tear, mortgage payments and void periods have been factored in, the reality is that the income return may be significantly lower than 4%.

Given that FTSE 100 house-builder Taylor Wimpey (LSE: TW) has a dividend yield of around 9%, it could offer income investing potential over the coming years. Alongside another property-focused stock which released an update on Tuesday, it could be worth buying for the long term.

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Strong momentum

The company in question is student accommodation manager and developer Unite Group (LSE: UTG). Its trading update showed it has continued to experience strong demand, with market dynamics being supportive. This has enabled it deliver a portfolio that is 98% let for the 2018/19 academic year, with full-year rental growth in line with its 3-3.5% target.

The company has been able to deliver further improvements in customer satisfaction scores, and is on track to deliver its full year efficiency targets of 75% net operating income margin, as well as 25-30 basis points overhead efficiency.

With a dividend yield of 3.3%, Unite Group may not be the highest yielding stock in the FTSE All-Share. However, its resilient financial and operational performance suggests its business model is sound, and the prospect of rising dividends in future years is high. And with a 3.8% dividend yield forecast for next year, the income return prospects for the business seem to be sound.

Bright future

As mentioned, the Taylor Wimpey share price has a dividend yield of 9% in the current financial year. Although this includes a special dividend, the current level of payout seems to be affordable. The company’s dividend cover is expected to be 1.4 times in the current year, which suggests that dividend growth could be ahead as a result of a forecast rise in earnings over the next couple of years.

Of course, the prospects for the UK economy, and for the housing market, remain uncertain. Brexit could mean that confidence in the industry comes under pressure. But this could create an opportunity to buy house builders while they include a margin of safety, with Taylor Wimpey having a net cash position, large land bank, and being set to benefit from a continued loose monetary policy over the coming years.

Therefore, while paper losses may be recorded by its investors in the near term, in the long run the prospects for the business seem to be positive. Trading on a price-to-earnings (P/E) ratio of 9.1, Taylor Wimpey appears to offer a wide margin of safety. This could allow it to generate a high capital return alongside its sky-high dividend yield, which means that now may be the perfect time to buy it.

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Peter Stephens owns shares of Taylor Wimpey. 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.