7.9% yield! Should I buy this cheap FTSE 100 passive income stock to live like a king?

Against a backdrop of a struggling UK housing market, our writer considers whether this passive income stock is too cheap to ignore.

James Beard

After studying Business Economics at the University of Leicester, James completed a Master's degree in Development Economics. He then joined an accountancy firm in London and went on to qualify as a chartered accountant. James finished his career in practice as a Senior Assurance Manager at PricewaterhouseCoopers in the Middle East. He has since held various senior finance positions - mainly in SMEs but also in an AIM-listed company - in the energy, engineering and manufacturing sectors, both in the UK and Ireland. He is now a Fellow of the Institute of Chartered Accountants in England and Wales (ICAEW) and joined The Motley Fool in September 2023. James invests primarily in UK stocks through his Stocks and Shares ISA and Self-Invested Personal Pension Plan. He enjoys using his accountancy training to review annual reports and earnings releases in an attempt to identify potentially undervalued companies. He also likes dividend stocks and follows the tried and tested approach of reinvesting all of the income he earns buying more shares. His favourite investment quote comes from Warren Buffett. He once said: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."

Published 6 May, 2023 11:00 am BST

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Today King Charles III will officially be crowned the country’s monarch. It therefore feels timely to look for a stock that’ll pay me a generous level of passive income. Perhaps one that’s fit for a king?

Taylor Wimpey (LSE:TW.) could be that stock.

The housebuilder has a policy of paying around 7.5% of its net assets — or at least £250m — in dividends each year. Based on the company’s balance sheet at 31 December 2022, this equates to £337m.

Last year, it increased its dividend by 9.6% to 9.4p per share. This would cost £332m if the same payout is made in 2023.

Dividend (pence per share)	2021	2022
Interim	4.14	4.62
Final	4.44	4.78
Total	8.58	9.40

Outlook

But housing completions are expected to be a lot lower this year. The company expects to sell between 9,000 and 10,500 houses in 2023.

Last year’s pre-tax profit per house (before legacy costs for replacing dangerous cladding) was £64,144. I therefore estimate this year’s earnings to be between £577m and £674m.

Even at the lower end of expectations, this is more than sufficient to cover a dividend of 9.4p per share.

But given the available headroom, I wouldn’t be surprised if the directors pushed this closer to 10p. This would give a yield of 7.9%, almost twice the FTSE 100 average.

Metric	2018	2019	2020	2021	2022
Revenue (£m)	4,082	4,341	2,791	4,285	4,420
Profit before tax (£m)	811	836	264	680	828
Exceptional costs relating to cladding replacement (£m)	–	–	10	125	80
Net assets (£m)	3,227	3,308	4,017	4,314	4,502
Completions	14,933	15,719	9,609	14,302	14,154

However, a recovery in the UK housing market is not guaranteed. The economy is still shrinking and the Bank of England is expected to announce further base rate increases.

However, the latest Nationwide house price survey has reported the first increase in prices for seven months.

And Taylor Wimpey has seen an increase in its weekly sales rate, although not all of these will be recorded as revenue in 2023.

I think the green shoots of a recovery are starting to appear.

My verdict

On the death of his mother, King Charles inherited the Duchy of Lancaster. The latest accounts show ownership of £59m of equities. I’ve no idea whether this includes a stake in Taylor Wimpey but if I was responsible for the Duchy’s investments, I’d buy the stock.

At 23 April 2023, the company had an order book equivalent to 8,576 homes. And 86,000 plots ready to build on. Its latest trading update says that cost increases have started to moderate and the availability of mortgages is increasing once more.

Although there’s some short-term uncertainty surrounding the state of the housing market, I’m sure it’ll pick up soon. As the outlook becomes clearer, I’m confident that the Taylor Wimpey share price will start to climb. It therefore makes sense to buy now, to mitigate against the generous dividend yield starting to fall.

In terms of my own portfolio, I already own shares in another housebuilder, Persimmon. I believe in the benefits of diversification so I don’t want to own shares in two UK builders. To be honest, I’d like to swap my Persimmon stock for Taylor Wimpey. But I’m sitting on a large paper loss at the moment so, for now, I’m going to stick with what I have.