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The Taylor Wimpey share price is rising. Here’s why I’d buy now to lock in top dividends

Updates from the UK’s housebuilders have been having a positive effect on Taylor Wimpey (LSE: TW) over the past week. And as a top long-term dividend-payer, I can’t help seeing the FTSE 100 company as a barometer of the housebuilding sector. Despite an early recovery from the worst of the Covid-19 slump, the Taylor Wimpey share price had been drifting down a little.

With the shares now ticking up again in recent days, I want to examine Taylor Wimpey’s prospects for getting back to paying strong and reliable dividends. But first, I’ll recap the news from the competition.

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Firstly, we had a trading update from Barratt Developments. Barratt already has all its sites reopened. And, apart from those isolating, all employees are back at work too. While the pandemic lockdown obviously had an impact on build completions, customers are already returning and the firm’s order book is building up nicely. The Taylor Wimpey share price perked up 5% on the back of Barratt’s good news.

Taylor Wimpey share price rising

Next comes Thursday’s first-half trading update from Persimmon, saying very similar things. The key points to me are a 15% year-on-year increase in forward sales, and news of cash holdings of approximately £830m. Also, though completions were down, Persimmon’s average selling price actually rose – from £216,942 to £225,050. Oh, and the Taylor Wimpey share price is up another 3% on the day as I write, in response to Persimmon’s optimism.

Taylor Wimpey is due to release first-half results on 29 July, so we don’t have long to wait. But what about the dividend prospects? Due to the financial constraints imposed by the lockdown, the company canceled its 2019 final dividend and its planned 2020 special dividend. That left shareholders with a 2019 yield of just 2%.

Forecasts suggest a smaller payment this year, which would amount to around just 1.8% (even on today’s depressed shares). But what might the 2021 dividend look like?

Dividend plans

Taylor Wimpey’s original plan was to pay 7.6p in total ordinary dividends for the 2019 year, plus 10.99p in special dividends in July 2020. I don’t expect shareholders’ rewards to be back to that level by next year, but I do expect some solid progress. Even if 2021 sees cash equivalent to that intended ordinary 7.6p, we’d be looking at a yield of 5.2% at the current Taylor Wimpey share price.

If we get back to levels in line with those original 2020 plans within the next couple of years, that mooted total of 18.59p would deliver a massive 12.7% yield. At least, that’s on today’s share price. If you wait until things become clearer in the coming months, I’m confident the shares will have gained significantly by then. And you’ll lock in a lesser effective yield.

Future income streams

Even if we don’t see those payment levels being achieved in the short to medium term, I think anything above that curtailed 7.6p ordinary payment should turn an above-average dividend into something well worth having. If we guess at special dividends of half the 2020 target, at 5.5p, that could still provide a yield of 9%. Again, that’s on today’s Taylor Wimpey share price.

I don’t think the opportunity to lock in future yields at that level will be with us much longer, and I’d buy now.

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Alan Oscroft owns shares of Persimmon. 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.