With the stock market showing increasing signs of volatility, I’m on the hunt for high-yielding, dividend stocks to generate a passive income. Housebuilders may be one of the most beaten-down sectors in the FTSE 100, but one stock stands out for me.
Dividend champion
The stock in question is Taylor Wimpey (LSE: TW.) In the face of a deteriorating housing market, the resilience of its dividend policy stands out.
While most of its peers have either frozen or lowered their dividend, Taylor Wimpey has done the opposite. In H1 2023, it raised its dividend per share (DPS) 3.6% compared to the same period in 2022. It now sports an 8% yield, twice the FTSE 100 average.
Management is committed to maintaining the dividend through a “normal” downturn. But it has gone further, and it believes that its policy can withstand a reduction of 30% in volumes and 20% in prices from the peak.
To date, volumes have reduced 26% from their peak in 2021. But prices have remained resilient, declining by only 3%. This provided it with confidence to raise the dividend.
Future dividends
The ability of the business to continue to pay market-beating dividends is a function of cash flows. Net cash for the period fell 25% to £650m. For the full year, it’s guiding in the range £500m-£650m.
Analysts have pencilled in a DPS for 2023 of 9.4p. I believe it can meet expectations.
Completions in H1 were slightly ahead of expectations at 5,120. Foreseeing a downturn, it moved early to align build-to-sales rates and reduce its overheads. It has also taken a prudent stance in its land acquisitions strategy.
However, as we move into 2024, my conviction that it can maintain its dividend policy is on much shakier ground.
In its August survey data, the Royal Institute of Chartered Surveyors, paints a pretty bleak picture for the housing market.
Its headline price growth gauge posted its most negative reading since February 2009. Going forward, price expectations are signalling further falls to come over the next few months.
Repeat of 2008?
Housebuilding is by its very nature a cyclical business. Many fear that the industry could be on the cusp of another crash. But any suggestion that we could witness a downturn of a similar magnitude to that of the global financial crisis is, in my opinion, overdone.
The lack of supply in building new homes is the underlying that which has propelled prices ever higher since that crisis. The only way to solve this problem is to build more homes.
Compounding the problem has been soaring borrowing costs. Sellers, who locked in attractive long-term rates, have no incentive to sell at the present. They know that if they do, they will end up paying higher rates.
This is an example of a Bank of England policy that has had the opposite effect from what was intended. Yes, prices have fallen, but they’re still significantly higher than before all the Covid-related stimulus measures.
It’s little surprise to hear that Warren Buffett has been buying housebuilders recently. Taylor Wimpey is, I believe, the pick of UK housebuilders and I think investors should consider its shares for their portfolios.
