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When the instances are good, housebuilders will be very profitable revenue shares. Have a look at Taylor Wimpey (LSE: TW) for example. The Taylor Wimpey dividend yield is 8.8%.
Then once more, the corporate did minimize its interim dividend this yr from 4.80p per share to 4.67p.
If that 3% minimize was utilized to the full-year dividend, it will indicate 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 total (of which Taylor Wimpey is a member) has a 3.5% dividend yield, that strikes me as very engaging.
An inconsistent observe file
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.
However when issues decelerate, housebuilders can see income stoop, with capital tied up in land banks and unsold properties. That’s hardly ever excellent news for dividends.
In actual fact, Taylor Wimpey’s dividend final yr was already barely smaller than the prior yr’s.
Wanting additional again, a great reference level is 2008. In that difficult yr for the British and international financial system, Taylor Wimpey reported a lack of £1.8bn. Because the annual report put it again then, “the Board didn’t really feel it acceptable to suggest an interim dividend because of the deterioration in market situations” 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 will be at instances — and what which means for dividends.
The place do issues go from right here?
Taylor Wimpey lists atypical dividends as solely its third capital allocation precedence, after sustaining a powerful steadiness sheet and investing in ongoing work and its land financial institution.
It goals to pay out as an atypical dividend 7.5% of internet belongings or no less than £250m yearly all through the cycle.
That ‘all through the cycle’ a part of the coverage is vital, 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 could 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 might 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 similar level final yr.
Amid ongoing uncertainty in regards to 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 can’t be including Taylor Wimpey to my portfolio.
