Usually, investors tend to sit in one of two camps. Either they will buy a share based on the dividend prospects, or for share price appreciation. The type of company usually differs in each case, with high-growth firms reinvesting profits instead of paying out dividends and vice versa. However, there are always exceptions. Personally, I think Taylor Wimpey (LSE:TW) shares offer something for both camps.
Taylor Wimpey shares potential
Taylor Wimpey is a UK-based homebuilder. Last year it had 9,799 completions, with a customer satisfaction rate of 92%. The pace of building and development isn’t showing signs of slowing down either. The company agreed terms on land purchases worth £1.3bn last year, representing 22,600 plots.
Over the past year, Taylor Wimpey shares have risen 24%, reflecting the optimism and performance seen from the business. Personally, I think this drive higher can continue.
Earlier this month, the ONS released the latest house price index, that showed an increase of 10% year-on-year. This is incredibly robust. Although it’s a backward-looking indicator, growth could still continue. This is because even though the stamp duty holiday has finished, the threshold of £250,000 is still in place until October. With the average house price just above this level, I think plenty of purchases could still be going through.
For Taylor Wimpey shares, higher house prices should mean a higher share price. The end product of completion is worth more to the business, boosting revenue.
A risk here is that although Taylor Wimpey is getting more plots that will be worth more in value, it could be relatively short-lived. Looking into 2022 and beyond, how long can the property market stay supported before a natural correction occurs? And if we see the economy struggle with the impact of the pandemic for longer than thought, pressure on income might make homebuyers sit on their hands.
Room for income investors
Aside from the potential appreciation of Taylor Wimpey shares, what about the income? Well the current dividend yield is 2.5%, below the FTSE 100 average of 3.23%. But this doesn’t tell the whole story.
The expected interim dividend is 4.14p, so when I add this to the existing dividend paid in May of 4.14p, the annual forward yield is 5%. This becomes a lot more attractive to an income investor.
The risk from an income point of view is that homes are very illiquid assets. So although the strength of the balance sheet might look good, cash flow might be hampered if completions aren’t converted into cash. This in turn could reduce the amount available to be paid as a dividend.
However, I think Taylor Wimpey shares could get a boost from income investors buying in. It then becomes a bit of an upward spiral, as an increase here should then attract more growth-focused investors too. Therefore, I’m considering buying shares in Taylor Wimpey in August.
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jonathansmith1 and The Motley Fool UK have 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.