The FTSE 100 consists of a large number of companies that offer excellent dividends. These payouts to shareholders are one way I can make a passive income.
When a business I own shares in issues a dividend, I can log in to my brokerage app and see a cash deposit has been made. All automatic. Couldn’t be easier. And right now, there’s a stock that I’m thinking of buying to get more of these dividend payouts. Is it a buy for me? Let’s look.
A cheap price for this housebuilder?
The stock I like the look of is housebuilder Taylor Wimpey (LSE: TW). The shares of this company, like a lot of British shares, look cheap at the moment.
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The share price is down 49% from its pre-pandemic high, and the stock trades at a price-to-earnings multiple of 7.4. That’s less than the FTSE 100 average (14) and the UK housebuilder average (11.2).
I like the sound of getting in at a cheap price, but is there further to fall? The looming recession and high interest rates may put people off purchasing homes.
The housing market is traditionally cyclical, and this might be one of those lean periods. If I bought shares now, I could be in for a rough year or five. So the question is: if I held this stock, would the dividend payments be worth any short-term pain?
A superb dividend yield
At the current share price, Taylor Wimpey offers an annual yield of 8%. If I bought in today at a £20,000 stake, I’d receive £1,600 into my account back from the company each year if that yield holds.
That’s a decent starting point, but it doesn’t do justice to the kind of returns I could get with compound interest.
Let’s say I was able to hold my £20,000 stake for 10 years at 8%, so it was now worth £43,179. So I’ve doubled my money within a decade.
But I’m in this for the long term, and if I could hold my £20,000 stake for 30 years at 8%, it would snowball into £201,253.
The compound interest has turned my initial amount into over 10 times the value. In fact, that amount is higher than the average pension pot that UK workers retire with (around £190,000).
And because these dividend payments are automatic, I’ve done nothing extra to get these returns. I can forget about it and the payments will still appear in my account. That’s true passive income, to me.
There are risks with this kind of investing. For one, dividends can change depending on the health of the business or stock market. Also, a fall or rise in share price would affect my total returns as well.
Am I buying?
My strategy is to hold shares in multiple companies. This way, I will receive dividends and gains from share price growth, only with less risk compared to if I invested in only one company.
Is Taylor Wimpey going to be one of those companies? Well, British shares are looking cheap right now. So, as attractive as that dividend is, I can see too many other stocks that could offer great returns without the short-term headwinds of the housing market.
