Housebuilder shares are popular within the UK investment community. One reason for this is they often sport high dividend yields. Housebuilders can be risky investments though, as the industry is very cyclical. Here’s a look at what would have happened if I’d bought Taylor Wimpey (LSE: TW.) and Persimmon (LSE: PSN) shares for dividends a year ago.
Share price losses
Let’s start with share price action. A year ago, Taylor Wimpey shares closed at 144p while Persimmon’s closed at 2,283p. Today however, the shares are trading at 116p (down 19%) and 1,234p (down 46%) respectively, as a result of weakness in the UK property market.
So if I’d put £2,000 into each, my investment in Taylor Wimpey would now be worth around £1,610 while Persimmon would now be worth around £1,080 (ignoring trading commissions).
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From £4,000 invested, I’d now have about £2,690. That’s a significant capital loss.
Lower-than-expected dividends
As for dividends, this time last year, Taylor Wimpey was expected to pay out around 9.5p for 2022 (a yield of around 6.5%). Now, it ended up paying out 9.4p per share for 2022, so the forecast wasn’t far off.
The same can’t be said about Persimmon. This time last year, the housebuilder was expected to pay out around 240p per share for 2022 (a yield of around 10.5%). It recently cut its dividend significantly however, and ended up paying out 170p per share (a yield of about 7.5%).
Looking ahead, analysts expect Taylor Wimpey and Persimmon to pay out 9.1p per share and 77p per share for 2023 respectively.
So my dividend income stream from the two housebuilder shares would be a lot lower than I originally anticipated.
Disappointing results
Overall, if I’d bought these shares a year ago, I wouldn’t be happy today. Not only would I be sitting on large capital losses, but I’d also be looking at less dividend income than I originally expected.
Given that the FTSE 100 index has risen about 1% (not including dividends) over the last year, I’d be quite disappointed with my investments.
Safer dividend stocks to buy?
The takeaway here, to my mind, is that investors need to be very careful with housebuilding stocks.
This industry goes through boom/bust cycles on a fairly regular basis, so investing in these stocks at the wrong time, the results can be disastrous. Often, the high yields on offer turn out to be a bit of a trap.
Of course, it’s possible to make money from the housebuilders. If bought and sold at the right time, these shares can deliver big returns for investors.
However, getting the timing right is challenging. Not only do investors need to buy near the bottom of the business cycle, but they also need to sell near the top of the cycle. That’s hard to do consistently.
Given the volatile nature of housebuilder shares, I avoid them personally. When it comes to dividend shares, I prefer to invest in companies that have fairly stable share prices as well as long-term dividend growth track records.
