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When the instances are good, housebuilders might 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 lower its interim dividend this yr from 4.80p per share to 4.67p.
If that 3% lower 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 general (of which Taylor Wimpey is a member) has a 3.5% dividend yield, that strikes me as very enticing.
An inconsistent monitor document
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 giant 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.
Actually, Taylor Wimpey’s dividend final yr was already barely smaller than the prior yr’s.
Trying additional again, a very good reference level is 2008. In that difficult yr for the British and international economic system, Taylor Wimpey reported a lack of £1.8bn. Because the annual report put it again then, “the Board didn’t really feel it applicable to suggest an interim dividend on account of the deterioration in market situations” and the ultimate dividend was axed too.
To some, 2008 could appear a very long time in the past. However it’s a helpful reminder of how fragile the property market might be at instances — and what meaning for dividends.
The place do issues go from right here?
Taylor Wimpey lists odd 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 odd dividend 7.5% of internet belongings or at the least £250m yearly all through the cycle.
That ‘all through the cycle’ a part of the coverage is essential, by the way in which. It mainly means Taylor Wimpey can clean out unhealthy years with good, in order that in anyone yr its expenditure on dividends could not essentially match that concentrate on.
On prime of that, who’s to say how lengthy ‘the cycle’ is?
If the property market does properly 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 gadgets fell by greater than a fifth. Internet money was over two-fifths decrease than on the similar level final yr.
Amid ongoing uncertainty concerning the power of the economic system, I feel the outlook for the property market is tough to determine with confidence. For now, regardless of its mammoth dividend yield, I cannot be including Taylor Wimpey to my portfolio.
