Taylor Wimpey (LSE: TW) shares now pay out the third-largest dividend on the FTSE 100. The yield now sits at 8.01% with projections for the next three years at 6.78%, 7.65%, and 9.03%, too. For investors looking for stocks to put a reliable bit of cash in their pocket, is this an attractive stock to consider snapping up? Let’s answer.
Unusual policy
Part of the appeal of Taylor Wimpey is its somewhat unusual dividend policy. To account for the cyclical nature of house prices and home building in general, management aims to return 7.5% of net assets each year. In other words, the payments are tied to things like the land the company owes rather than the numbers on the income statements.
This has the effect of a more stable dividend payment as assets move less up and down compared to earnings. That is, of course, only while the company is making the money to pay for it.
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The next decade could bring sustained good performance for housebuilders too. One reason is more demand for houses thanks to an increasing population.
The Office for National Statistics released data on the trend this week. Over the 10-year reporting period, around 10m will flow into the country, with around 5m leaving. Up to 2032, the UK population will grow 7.2% to the 72m mark. That’s a net influx of 500k people a year.
Are we building 500k houses a year? Not even close. The last year on record came to 220k. The government’s own lofty targets – that many decry as unrealistic and unattainable – come to 300k. It seems inevitable that demand for housing will outpace supply.
Rising costs
High house prices bring many negative effects too, but it will likely result in more earnings for those building the houses. The consequence might be sustained high dividend payments for years to come.
More expensive houses aren’t the only thing that seems inevitable, so too do rising costs in the industry. Energy prices are higher on our islands than almost anywhere in the world. Labour costs have just gone up through minimum wage rises and Employer’s NI changes – a hefty bill for Taylor Wimpey with 6,000 employees and 15,000 contractors.
That’s not even to mention the cost of raw materials that started rising during Covid and exploded after the invasion of Ukraine. These surging costs are a huge headache and may be the biggest risk to the future dividends of Taylor Wimpey.
On the whole, I think there are good prospects here for both income and growth. Given the risks, I don’t think I would call this a slam dunk buy and won’t be buying in myself today. But if worries about costs were to ease then this would likely be a stock to make it into my own portfolio.
