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When the occasions are good, housebuilders could be very profitable earnings shares. Take a look at Taylor Wimpey (LSE: TW) for example. The Taylor Wimpey dividend yield is 8.8%.
Then once more, the corporate did reduce its interim dividend this yr from 4.80p per share to 4.67p.
If that 3% reduce was utilized to the full-year dividend, it could suggest a complete dividend per share for the yr of round 9.2p. That might nonetheless make for a dividend yield of 8.7%.
At a time when the FTSE 250 index general (of which Taylor Wimpey is a member) has a 3.5% dividend yield, that strikes me as very engaging.
An inconsistent monitor report
The query in my thoughts, although, is how robust is the Taylor Wimpey enterprise and what does that imply for its dividend prospects?
Housebuilders, in any case, are infamous for being strongly tied to the property market cycle. When homes are promoting like sizzling desserts, they will generate massive quantities of money and pay it to shareholders as dividends.
In reality, Taylor Wimpey’s dividend final yr was already barely smaller than the prior yr’s.
Trying additional again, reference level is 2008. In that difficult yr for the British and world financial system, Taylor Wimpey reported a lack of £1.8bn. Because the annual report put it again then, “the Board did not feel it appropriate to propose an interim dividend as a result of the deterioration in market conditions” and the ultimate dividend was axed too.
To some, 2008 could seem a very long time in the past. However it’s a helpful reminder of how fragile the property market could be at occasions — and what which means for dividends.
The place do issues go from right here?
Taylor Wimpey lists unusual dividends as solely its third capital allocation precedence, after sustaining a powerful stability sheet and investing in ongoing work and its land financial institution.
It goals to pay out as an unusual dividend 7.5% of internet property or at the least £250m yearly all through the cycle.
That ‘throughout the cycle’ a part of the coverage is necessary, by the best way. It principally means Taylor Wimpey can easy out unhealthy years with good, in order that in anybody yr its expenditure on dividends might not essentially match that concentrate on.
On high of that, who’s to say how lengthy ‘the cycle’ is?
If the property market does nicely and Taylor Wimpey retains producing sufficient surplus money, I feel it may keep and even develop its dividend.
It grew income 9% yr on yr within the first half. However its revenue earlier than tax and distinctive objects fell by greater than a fifth. Internet money was over two-fifths decrease than on the identical level final yr.
Amid ongoing uncertainty concerning the power of the financial system, I feel the outlook for the property market is troublesome to determine with confidence. For now, regardless of its mammoth dividend yield, I cannot be including Taylor Wimpey to my portfolio.
