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FTSE 100 housebuilder Taylor Wimpey (LSE: TW) is down 23% previously 12 months. As a inventory’s dividend yield rises when its worth falls, this has pushed up the return to a whopping 9.4%.
That is greater than triple the present FTSE 100 common of three.1%. It is usually greater than double the ‘risk-free rate’ (the 10-year UK authorities bond yield) of 4.4%.
Having purchased the inventory some time again, I ponder if now could be the time to purchase extra?
What’s my okayey consideration?
My main concern is how reliably it could possibly keep such a excessive dividend yield.
The consensus of analysts is that Taylor Wimpey pays a dividend of 93.3p this 12 months, 90.9p subsequent 12 months, and 92.1p in 2027.
Based mostly on the present £1.01 share worth, these would generate respective yields of 9.2%, 8.9%, and 9.1%.
Essential earnings progress issue
Wanting deeper, it’s in the end the case that any agency’s dividend returns are pushed by its earnings (or ‘profits’) progress.
A danger to Taylor Wimpey’s is any important worsening within the cost-of-living disaster.
Nevertheless, analysts forecast that its earnings will develop a stellar 35.1% a 12 months to end-2027.
On this context, its H1 2025 figures regarded promising. Income rose 9% 12 months on 12 months, whereas house completions jumped 11% to five,264. The agency stated it might hit 10,400-10,800 UK completions this 12 months in comparison with 9,972 in 2024.
It reiterated this steerage in its 12 November buying and selling replace. It additionally underlined that it anticipated to make an working revenue of round £424m this 12 months, towards £416m final 12 months.
I imagine additional catalysts for progress are authorities measures to spice up the UK housing market. The broad goal is to construct 1.5m homes over its five-year tenure. And extra not too long ago, Chancellor Rachel Reeves introduced one other £10bn to be spent on new homes.
A share worth bonus?
I don’t promote shares I maintain for passive earnings until their dividend yields fall beneath 7%. Such a fall would cut back the compensation over the risk-free fee that I get for taking the extra danger in share funding.
Nevertheless, if I have to promote, I’d relatively make a revenue. And the possibility of this occurring will increase the extra undervalued the inventory is to start with.
In Taylor Wimpey’s case, a reduced money move valuation exhibits the shares are a shocking 71% undervalued at their present £1.01 worth.
Due to this fact, their ‘fair value’ is £3.48.
How a lot dividend earnings can I make?
As of now, one other £10,000 funding within the agency would make me £15,506 in dividends after 10 years. This components in reinvesting the dividends again into the inventory (‘dividend compounding’).
Over 30 years on the identical foundation, the dividend payout would rise to £155,935.
Together with the £10,000 funding, the worth of the holding can be £165,935 by then.
And that may pay me a yearly dividend earnings of £15,598! However after all, this isn’t assured and I may lose cash in addition to make it.
My funding view
Given its very robust earnings progress prospects, excessive undervaluation and ultra-high yield, I’ll purchase extra of the inventory as quickly as potential.
And I even have my eye on different undervalued, high-yielding shares too.
