I’ve bought Lloyds (LSE: LLOY) shares on a couple of occasions over the past year and I’m not done yet. I think it’s one of the most exciting dividend income stocks on the FTSE 100, and it looks stupidly cheap, trading at less than 43p.
The problem is, I can’t buy every stock I see. I’m on a limited budget, here. Buying shares is all about priorities and right now I’ve got another FTSE 100 stock on my buy list, housebuilder Taylor Wimpey (LSE: TW).
Missing my chance
I was desperate to buy when it dipped below 100p in early July, but didn’t have the cash. I clearly wasn’t the only investor who had taken a fancy to Taylor Wimpey as the share price quickly jumped by 15%. Now I do have some money to invest cash and, while I still think it’s good value at today’s 116p, it’s not as good as it was.
These are tough times for housebuilders, as rising interest rates and falling incomes hit people’s property purchasing power. Right now, there’s a lot of known unknowns. Such as how sticky inflation will be. Whether lenders will continue to cut mortgage rates. And how many buy-to-let investors are set to exit the market. Investors are watching the data like hawks, and so am I.
Buying a housebuilder today is risky and I would rather purchase Taylor Wimpey on a dip than a spike. To be fair, the shares already look cheap, trading at 6.3 times earnings. The dividend looks generous with a forecast yield of 8.03% this year and 7.97% next. While shareholder payouts could be vulnerable, I’m optimistic.
Earlier this month, management announced a 21.2% drop in revenues to £1.64bn but said it still has £654.9m in net cash, up slightly on a year ago. Management was confident enough to hike the interim dividend from 4.62p to 4.79p per share. I’ll buy Taylor Wimpey before it goes ex-dividend on 13 October. If I invested £5,000, I’d get 4,350 shares, which will pay me around £208 on 17 November and that’s just for starters.
There’s trouble ahead
Lloyds shares went ex-dividend on 3 August and I’m looking forward to getting some cash on 12 September. I’d love to top up my position over the months ahead, when I’ve the money to hand. The share price also looks great value at 5.9 times earnings and the forecast yield is 6.5%, covered twice by earnings.
A house price crash would hit Lloyds almost as hard as Taylor Wimpey, as it could lead to a sharp rise in debt impairments. Yet the bank has benefited from rising interest rates, which have widened margins. With the Bank of England warning that base rates could stay above 5% all the way through to 2026, that could offset the impairment issue.
When the UK finally shakes off its malaise, both Taylor Wimpey and Lloyds should reap the rewards. By purchasing during today’s stock market volatility, I aim to be ready. Since I already hold Lloyds, that means buying Taylor Wimpey first. After that, I’ll turn my attention back to Lloyds.
