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Buyers typically have to be cautious of shares with 9% dividend yields. Taylor Wimpey (LSE:TW), nonetheless, has an uncommon coverage that makes its distributions unusually resilient.
Because of this, the agency has largely managed to keep up its returns to shareholders in a weak housing market. However even for passive revenue, there’s extra to a inventory than its dividend.
Sturdy dividends
Increased rates of interest have induced dividends from UK housebuilders to fall sharply. Bellway (-58%), Berkeley Group (-83%), and Persimmon (-74%) have all made large cuts since 2022.
In contrast, Taylor Wimpey’s dividend is sort of precisely the place it was three years in the past. Within the context of what’s been occurring within the wider trade, that’s excellent.
The reason being that Taylor Wimpey has a novel dividend coverage. Moderately than returning money to shareholders based mostly on its earnings – as most companies do – it does this based mostly on its belongings.
This makes for a way more steady revenue stream for buyers. However it will possibly imply the agency pays out greater than it brings in – and that is what’s been taking place over the previous few years.
It’s additionally why I anticipate the dividend to be comparatively resilient in 2026. Even when the housing market stays subdued, the agency has numerous belongings that ought to help returns to shareholders.
In truth, I feel this may keep on effectively past 2026. And so long as the dividends maintain coming, do buyers on the lookout for passive revenue actually need to fret about the rest?
Investing
Anybody wanting a solution to that query can select between the lengthy reply and the quick reply. The lengthy reply is “sure, they do” and the quick reply is “sure.”
Taylor Wimpey has been distributing greater than it’s been making, however the money has to return from someplace. And the impact has been exhibiting up on the agency’s steadiness sheet.
The corporate doesn’t have an issue with debt, or something like that. However its e-book worth (the distinction between its belongings and its liabilities) has been falling during the last couple of years.
In different phrases, the enterprise has been performing like a (very) slowly melting iceberg over the previous few years. The agency has – in impact – been financing its dividend by promoting off its belongings.
The inventory buying and selling at a price-to-book (P/B) ratio beneath 1 means this is smart. However it will possibly’t go on without end and buyers must hope issues choose up in some unspecified time in the future sooner or later.
Whereas Taylor Wimpey has maintained its dividend, the inventory market has seen its e-book worth declining. And that’s why the share value is down 40% within the final 4 years.
Excessive danger, excessive reward?
Taylor Wimpey’s distinctive dividend coverage has made it a extra sturdy supply of passive revenue than different housebuilders. However shareholders can’t simply ignore the place that money is coming from.
If issues don’t enhance ultimately, the dividend coverage will speed up the corporate’s decline. And that’s finally not a lot good to buyers, no matter their ambitions are.
I do assume the UK housing market is a promising avenue for buyers to discover. However I’m taking a look at one other title for my very own portfolio.
