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12% dividend yields! Or why I think investors are underestimating this FTSE 100 income stock

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After a solid start to the year — a period in which its share price surged 40% in a little under four months — Taylor Wimpey (LSE: TW) has seen its share price fall back to earth more recently.

I find this something of a surprise, even if the fall of prime minister Theresa May, mixed with the likely coronation of an ardent Brexiter as our next prime minister, has raised the possibility of a disorderly European Union withdrawal.

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The economic outlook is as muddy as ever, sure. Yet buyer demand for newbuilds remains solid enough to keep powering profits among the homebuilders higher, a symptom of the UK’s gaping supply shortage. This is perfectly illustrated in the steady stream of positive trading updates from across the industry.

Yields just shy of 12%!

The likes of Taylor Wimpey might not be the stunning growth stocks that they were in days gone by, reflecting the sudden slowdown in property price increases following the 2016 Brexit referendum. City brokers are forecasting a modest 4% profits rise in 2019.

But their allure as tremendous dividend stocks remains strong, a quality that’s been strengthened by the aforementioned share price weakness that’s driven yields through the roof again. And, right now, this sits at a staggering 11.7%.

It doesn’t matter dividend cover sits at just 1.2 times for this year, some way below the accepted ‘safety’ threshold of 2 times and above. Taylor Wimpey is exceptional when it comes to creating cash and this enables it to pay vast rewards to its shareholders even when the market softens. It’s why the FTSE 100 firm chose last year to bulk up ordinary dividends and to pay a staggering £250m from 2019, on top of supplementary payouts totalling an even-larger £350m.

Stress tested and looking good

And why wouldn’t the board be confident enough to pay such big dividends? Taylor Wimpey generated a record £644.1m worth of net cash in 2018, up more than 25% year-on-year. What’s more, because of the length of its landbank, it has terrific control over when it puts it to work, allowing it to manage the balance sheet to keep paying big dividends extremely effectively.

As for the planned big ordinary payouts of beyond too, the Footsie builder has done its homework and stress tested its payout plan to see how it would fare in even the most adverse conditions. Taylor Wimpey found that even if home prices were to drop 20% and sales volumes by 30% that it could still afford to pay those ultra-large dividends.

Stock markets might be shaking as fears over Brexit, US trade wars and geopolitical fears in the Middle East worsen, causing investors to reassess their take on equities big and small.

In my opinion though, Taylor Wimpey has all the tools to keep growing profits and dividends and, given its forward P/E ratio of below 10 times, is a share which I consider to be irresistible at current prices. There’s plenty of brilliant blue-chips trading carrying dirt-cheap valuations, but I consider the homebuilder to be one of the best to buy today.

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Royston Wild 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.

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