When I’m looking at dividend options for passive income, Taylor Wimpey (LSE:TW) frequently comes up in conversation. Despite pausing the dividend temporarily during the pandemic, the company has experienced a rising dividend yield over the past year. Taylor Wimpey shares currently offer me a dividend yield of 6.76%. Here’s why I think I might buy the stock now.
Addressing the share price fall
Taylor Wimpey shares are down 29.5% over the past year. This doesn’t normally sound like a great start when it comes to deciding whether to invest or not. However, understanding the reasons behind this provides me with a more complete picture.
Firstly, there was concern about costs relating to the cladding scandal and who would be responsible to pay for it. Some of this has been alleviated in recent months, with Taylor Wimpey setting aside provisions of £245m to make safe the structures involved. But the reputational damage along with the provisions set aside have been a drag on the share price.
Further, CEO Pete Redfern announced that he would be stepping down after 15 years at the helm. Even though the new CEO (Jennie Daly) is experienced, there’s always some concern about the future direction of a business after someone departs after so long in charge.
As a final note, I also think some investors are getting a little concerned that the rally in the housing market is stalling and sales could drop. Taylor Wimpey benefits from higher average selling prices directly, so any slump would hit revenues.
Using Taylor Wimpey shares for dividends
A falling share price does help when it comes to the dividend yield. If the dividend per share remains the same, a lower share price will increase the dividend yield. It’s as if I’m getting better value for my money.
I think that Taylor Wimpey shares could offer me good income in years to come despite the recent share price fall. Firstly, the company operates on high profit margins. For example, the operating profit margin target is 21%-22%. At such levels, even a large swing in costs or revenue can be handled without a material risk of losing money. If the chances of losing money are slim, the chances of being paid out a dividend remains high.
Further, the business operates with a forward order book. This means that it knows in advance the housing demand at any one time for the coming period. In the 2021 report, it stated that it has an “excellent order book amounting to 10,009 homes (31 December 2020: 10,685 homes) excluding joint ventures, valued at £2,550m (31 December 2020: £2,684m)”.
For an income investor like me, having a good outlook is perfect. This makes it reasonable to conclude that a dividend will be paid based on the 2022 results. This could help me forecast my passive income with more certainty.
Dividend potential for the future
In a world with high inflation, having good dividend stars in my portfolio are important. At an individual level, I think I’m going to buy Taylor Wimpey shares. The share price sell-off represents a good buying opportunity, especially when I think the outlook is still robust.
