I started buying the UK housebuilder in 2023, dazzled by its low valuation, juicy yield and solid balance sheet. Yet I knew it faced challenges.

Housebuilders took a beating after the 2016 Brexit vote, falling 40% on fears the property market would crash. But it didn’t. The sector faced more uncertainty during the 2020 pandemic, yet there was no Covid crash. And when inflation and mortgage rates soared due to the Ukraine war, a house price crash was forecast but never came. The Iran war hasn’t triggered one either yet Taylor Wimpey shares have still plunged.

Why has this FTSE 250 stock been hit so hard?

They’re down almost 55% over the last five years and 33% over 12 months. Trading at around 80p, they’re at levels last seen 13 years ago.

A quick glance at Taylor Wimpey’s pre-tax profits for the last five years tells us why the shares have had such a rotten run.

• 2025 – £146.5m
• 2024 – £320.3m
• 2023 – £473.8m
• 2022 – £827.9m
• 2021 – £679.6m

The big drop in 2025 was driven by exceptional costs, primarily £243.8m for post-Grenfell cladding fire safety provisions. Most of the other issues were out of the board’s control.

Higher inflation has squeezed buyers and driven up mortgage rates. It’s also pushed up the cost of labour and materials. Then increased employers’ National Insurance,and two big hikes to the minimum wage further squeezed margins. 2026 was supposed to be better but now mortgage rates are rising again due to the oil price spike.

Taylor Wimpey isn’t an outlier by the way as every major UK housebuilder has taken a beating too.

Is that dividend sustainable?

That headline trailing yield of 11.75% is stunning but sadly, you won’t get it. The forward yield is projected to drop to 8.16% in 2026. This table will show you what’s going on:

That huge 107% jump in 2021 was the board compensating for cancelling shareholder payouts in the pandemic. Dividends have been cut in the last two years, and by a hefty 19.45% in 2025. We can’t rule out further cuts until market conditions improve. So when will that be?

I can’t see a swift resolution to the Iran war. Even if we get one, inflation is likely to remain on the high side. Mortgage rate expectations are changing from one day to the next. The UK economy is struggling and Taylor Wimpey has already warned of a softer order book and pricing in 2026. But on the plus side, it did feel able to greenlight a £52m share buyback.

I still believe in Taylor Wimpey. But until the economic cycle swings back in its favour, I expect it will continue to struggle, and the dividend will remain under pressure. Income seekers able to take a long-term view might consider it, but I think there are less challenging recovery opportunities on the FTSE today.

Should you invest £5,000 in Taylor Wimpey Plc right now?

When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Taylor Wimpey Plc made the list?

Harvey Jones owns shares in Taylor Wimpey. 

The post Down 55% with an 11.75% yield – what on earth’s the matter with Taylor Wimpey shares?  appeared first on The Twelfth Magpie.

At first glance, the FTSE 250 member’s popularity looks incredibly odd. After all, the value of this company has fallen by almost a quarter in 2026 so far. For comparison, the index is up 5%.

This horrible run of form is nothing new either. Since May 2021, the stock has shed more than 50%.

Why are the shares in demand?

One potential explanation is that investors are sensing a striking contrarian opportunity. To paraphrase the legendary Warren Buffett, they’re being “greedy when others are fearful” and “buying quality merchandise when it’s marked down“.

The idea behind this is that those brave enough to buy now will reap the reward when the recovery comes. Of course, the snag with all this is that it may never arrive.

On an optimistic note, Taylor Wimpey still looks financially robust. Its balance sheet boasts a net cash position. The £2.8bn cap business possesses a lovely land bank too.

We also can’t ignore the dividend yield. This currently stands at 8.7%. Try to find a savings account that will pay this sort of rate! At a time when everyone is looking to make ends meet, that sort of cash distribution is hard to ignore.

Longer term, all major housebuilders — including Taylor Wimpey — stand to benefit from the demand for new homes. Regardless of who is in government, the current shortage can’t be ignored.

Risks ahead

This is not to say that holding the shares in the weeks and months ahead will be easy. With the full impact of the Iran-US conflict still to filter through, there’s a good chance that inflation will creep/march higher. This could see the Bank of England raising interest rates, just when we thought the post-Covid surge would draw a line under fast-rising prices.

Such a scenario will not be good news for the company as it faces higher building costs. It also won’t be great for the mortgage market and, subsequently, prospective buyers.

All this does go some way to explaining why the company is equally popular with short-sellers — those who believe there’s worse to come.

As much as the share price has already fallen, this stock is still not cheap either. A price-to-earnings (P/E) ratio of 12 actually makes it slightly more expensive than rivals. That valuation is also fairly average relative to the market as a whole.

The aforementioned monster dividend also can’t be guaranteed. Indeed, the near-7p per share payout forecast by analysts for 2026 doesn’t look set to be covered by expected profit. This can only continue for so long. Unless business improves, CEO Jennie Daly could be forced to make yet another cut.

My verdict

These risks aside, I’m still of the opinion that this company has the potential to reward investors handsomely if/when the housing market gets its mojo back. This being the case, I’m considering following the aforementioned investors and taking a position myself, albeit after making sure that my portfolio will still be sufficiently diversified if things get worse.

Should you invest £5,000 in Taylor Wimpey Plc right now?

When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Taylor Wimpey Plc made the list?

Paul Summers has no position in any of the shares mentioned.

The post Why is everyone buying Taylor Wimpey shares? appeared first on The Twelfth Magpie.

Despite government planning reforms and a political push to build more homes, the stock’s slumped around 31% in just three months, turning a £1,000 investment made in late February into roughly £690 today.

But with the sell-off dragging the dividend yield up to about 9.7%, I’m left wondering: why are Taylor Wimpey shares falling? And has this carnage created a genuine opportunity for income investors?

Why are Taylor Wimpey shares in decline?

The first thing to understand is that the homebuilding sector backdrop has turned nasty again. Taylor Wimpey and its peers were already under pressure from weak affordability as higher mortgage rates, sticky inflation and rising build costs squeezed both buyers and builders.

The war in the Middle East has since pushed up energy and funding costs, reigniting fears that mortgage rates could stay higher for longer, just as the market was hoping for relief.

The company’s own updates haven’t helped sentiment either. In March, the group reported that while 2025 revenue rose by 13% to £3,844.6m. But underlying operating margins slipped from 12.2% to 10.9%, resulting in underlying pre-tax profits falling by 5.8%.

As such, management kept its 2026 guidance for 10,600-11,000 home completions, and issued a £400m operating profit target for the year. But that’s lower than analysts were expecting.

Combining this soft guidance with similarly soft net private sales, it isn’t hard to see why investors have been hitting the Sell button.

Is this 9.7% yield a gift or a trap?

On the face of it, the income story looks mouth-watering. At a 9.7% yield, Taylor Wimpey shares have one of the highest payouts in the entire FTSE 250.

Sadly, this number’s misleading. With the group’s financials coming under pressure, dividends have followed. And total payouts in 2025 were slashed 19.5%. And looking at the latest analyst forecasts, another cut’s expected in 2026, with the dividend per share falling from 7.62p to 6.96p.

In other words, according to current analyst expectations, the real yield is closer to 8.86%. Yet that’s still a chunky payout. So while everyone else is writing off this FTSE stock, should I go against the crowd and buy shares?

What’s the verdict?

Despite the challenges plaguing this business, Taylor Wimpey still has a strong balance sheet and a sizeable land bank, giving it room to ride out a downturn while continuing to return capital, even if dividends are rebased.

If interest rates ease, buyer confidence improves, and margins stabilise, today’s depressed share price and elevated yield could look like a classic cyclical buying opportunity.

But that’s where the uncertainty lies. The housing market could stay tougher for longer. If build-cost inflation remains high, volumes disappoint, and management has to choose between protecting the balance sheet and maintaining the payout, further dividend cuts could follow, turning this tempting yield into an income trap.

For my part, I think this set-up’s fascinating. The risks are real, but so is the potential upside if the housing cycle turns in Taylor Wimpey’s favour.

For now, I’m staying on the sidelines. But if mortgage rates start trending downward again, I may have to reconsider.

Should you invest £5,000 in Taylor Wimpey Plc right now?

When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Taylor Wimpey Plc made the list?

Zaven Boyrazian does not hold any positions in the companies mentioned.

The post Down 31% in 3 months with a 9.7% yield, are Taylor Wimpey shares too cheap to ignore? appeared first on The Twelfth Magpie.

1. Taylor Wimpey: a discounted housing recovery play

Taylor Wimpey‘s (LSE:TW.) one of the UK’s largest residential housebuilders, and it currently trades at a meaningful discount to its long-run historical average.

While the majority of institutional analysts covering the stock hold a Hold rating today, a meaningful minority still rate the stock a Buy or Outperform. And there’s a compelling structural case to be made about this potential value stock.

In 2026, the UK housing market is still chronically undersupplied. And the government’s commitment to building 1.5 million new homes over the current parliament provides a powerful policy tailwind that should sustain demand for years.

Of course, there’s some understandable uncertainty about whether the UK government will actually hit that target, especially in the currently volatile political climate. Nevertheless, with almost all political parties in favour of building more homes, this long-term dynamic gives Taylor Wimpey a durable platform to grow into.

Operationally, the business is in better shape than its share price implies. Completions are recovering from post-pandemic lows, the order book’s rebuilding, and management’s maintained a progressive dividend policy through the downturn – an encouraging signal of genuine confidence in the outlook.

The risks are real though. With interest rates stuck in a holding pattern amid ongoing uncertainty in the Middle East, the expected improvement in mortgage affordability has yet to fully materialise. And this more expensive mortgage environment is blocking many first-time buyers from getting on the housing ladder.

Build cost inflation from labour and materials continues to squeeze margins, and planning delays also remain a persistent drag on delivery timelines.

2. RELX: a quality compounder hiding in plain sight

RELX (LSE:REL) is a data and analytics group serving the legal, insurance, scientific, and exhibition sectors. And even with all the recent price fluctuations, the company has continued to deliver consistent payouts to its shareholders. In fact, the company has now delivered 15 consecutive years of dividend growth an annual average 8.6% hike.

Full-year 2025 results showed adjusted revenue up 7% to £9.59bn and operating profit up 9% to £3.34bn. CEO Erik Engstrom captured the bull case clearly:

“The continued evolution of artificial intelligence is enabling us to add more value to our customers, as we embed additional functionality in our products, and to develop and launch products at a faster pace.”

But despite management’s confidence in the value-adding benefits of AI, the technology also opens the door to potential disruption.

If cheaper AI tools erode the perceived uniqueness of RELX’s proprietary data, corporate customers may cut back on their licenses and spending in favour of cheaper ‘good enough’ alternatives – a real threat that’s behind most of the recent volatility.

What’s the verdict?

Both stocks come with genuine risks. But they also show exciting promise for contrarian investors hunting for potential value stocks. Out of the two, I think RELX has the most potential due to its lower reliance on wider external market forces. But I’ve already added both companies to my watchlist.

Should you invest £5,000 in RELX right now?

When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if RELX made the list?

Zaven Boyrazian does not hold any positions in the companies mentioned.

The post Expert picks: 2 UK value stocks to buy in May? appeared first on The Twelfth Magpie.

The average house price in 2026 has grown to £274,000. What would that kind of sum look like in a Stocks and Shares ISA? And how much passive income might it return? Let’s answer those questions.

How much?

In simple terms, an investor might aim for a 5% dividend yield in the ISA, which would return £13,700 yearly from the £274k. This compares favourably to the current yields from housing, which hovers around 3%-7%. That figure does vary massively depending on location, house type, and other factors.

The long-term average, including share price appreciation, is closer to 10%. This would return an average of £27k a year. However, this would not be at all consistent with many down as well as up years along the way. Given the often volatile nature of the stock markets, it’s considered a bad idea to try to rely on such a high figure as passive income.

One side of the coin? Historical performance suggests stocks win handsomely in purely financial matters over long periods. The other side? There are no guarantees the future will be the same. A stuttering economy, a potential AI bubble popping, or a multi-decade stagnation like that Japan experienced are all risks investors should be aware of.

One option

Another advantage to the Stocks and Shares ISA is the flexibility of the type of investments within it. Let’s say you were bullish on the housing market in general. Then you might wish to consider a stock in a company like Taylor Wimpey (LSE: TW.) that builds houses up and down the country.

This does require doing the research of course. The housing sector is being rocked at the moment by inflation. The rising cost of materials and wages has led to a rough few years for such stocks. Taylor Wimpey shares have dropped 55% down to 79p. Someone who is not willing to take the rough with the smooth may think a house is a safer place to invest in.

Amid the turmoil, there may be a bargain hiding in plain sight too. Taylor Wimpey pays a huge dividend of 9.57% which looks stable for the short term. The possibility of falling interest rates could be a boon for the stock too. If general conditions improve, then this could be one of those stocks that perform above average and deliver passive income for years to come.

The post How much passive income could be generated from £274k in an ISA? appeared first on The Twelfth Magpie.

I added all three to my SIPP in 2023. They’ve been a disaster for my portfolio, each falling a third on my watch. And that’s despite me averaging down on bad news. There’s been plenty of it.

When will Taylor Wimpey shares recover?

The first flop is FTSE 250-listed house builder Taylor Wimpey (LSE: TW) – although it was in the FTSE 100 when I bought it. The shares are down 33% over the last year, and 55% over five. It now trades on a low forward price-to-earnings (P/E) ratio of just over 11. The forward yield is a mind-boggling 11.9%, but don’t be fooled. The dividend is being cut so investors can expect around 7.5%. Which still isn’t bad.

Taylor Wimpey has been hit by affordability issues, the cladding scandal, rising cost of labour and materials, the end of the Help to Buy scheme. Today, there’s the threat of rising inflation and interest rates. So can it turn that round?

Alas, I’m not very optimistic for this year. The UK economy looks set to struggle, as the Iran conflict drags on. I still believe it’s time will come. And I will keep reinvesting my dividends until it does.

Why is Diageo struggling?

Spirits giant Diageo (LSE: DGE) is still in the FTSE 100, although it’s not for want of trying. Its shares have done just as badly as Taylor Wimpey’s, down 34% over one year and 55% over five.

The Johnnie Walker, Baileys, Guinness and Smirnoff owner has also been struck by the cost-of-living crisis, which has forced drinkers to trade down from its premium brands, as well as US tariffs, and localised issues in Latin America and China.

It’s now headed by turnaround specialist Dave Lewis, who salvaged Tesco, and I’m optimistic he’ll work his magic again here. Sadly, he started by halving the dividend. Diageo’s forward P/E is also low at 12.4, way below its 10-year average of 22. But with the oil price spike squeezing drinkers all over again, patience is once more required.

JD Sports is a beaten stock

I’m afraid the same must be said of my final portfolio straggler – self-styled ‘King of Trainers’ JD Sports Fashion (LSE: JD). This was also hit by the consumer squeeze. The timing was unlucky, because it had lined up a big move into the US through the $1.1bn purchase of local retail chain Hibbett.

I thought JD looked like an unmissable bargain with a forward P/E of around six. Unfortunately, it’s still around that today. The JD Sports share price is down 17% over the last year and 64% over five.

I think all three have massive recovery potential and are worth considering today. Investors may have to be patient though. They all need a wider economic recovery, and that could take a year or two. I’m backing Diageo to recover first. It’s updating the market tomorrow (6 May), and I can’t wait to see what it says.

The post I’m backing these 3 disastrously cheap shares to rocket back to favour appeared first on The Twelfth Magpie.

Could they be a good option to consider for an ISA or Self-Invested Personal Pension (SIPP)? Let’s discuss.

Three things to like

At first glance, Taylor Wimpey shares look attractive. For a start, we have the massive yield mentioned above. For 2025, the company paid out 7.62p per share in dividends. So with the share price sitting below 80p, we’re looking at huge dividends.

Second, Britain continues to have a housing crisis. So the long-term story here appears to be favourable. It’s worth noting that according to the National Housing Federation, there are 8.5m people in England who can’t access the housing they need. Taylor Wimpey and the other UK housebuilders could help to fix this.

One other attraction of the stock is that it has fallen a long way. Over the last 18 months or so, it has dipped about 50%. After that kind of fall, there could be scope for a rebound. It’s worth noting that the average analyst price target is 108p (about 35% above the current share price).

What could go wrong?

When we dig deeper however, there are few issues that aren’t ideal. One is costs. Right now, all UK housebuilders are all saying the same thing – their costs are surging (due to energy and commodity prices). This is bad news for profits and dividends.

Zooming in on Taylor Wimpey, it said in late April that it now expects build cost inflation to be in the low to mid-single digits in 2026, up from its previous forecast of low single-digit inflation. As a result, analysts are now questioning its operating profit guidance of £400m for the year.

Worryingly, earnings forecasts are plummeting. Over the last month, the consensus earnings per share forecast for 2026 has fallen by around 10% (meaning the price-to-earnings (P/E) ratio of 12 may not be so reliable).

Another issue is affordability. All of a sudden, it looks like UK interest rates won’t come down much in 2026 (they may actually rise). This is a problem for Taylor Wimpey. Ideally, it needs rates to come down materially so that buyers pile into the housing market.

Finally, there’s the dividend. Not only is it predicted to fall to 6.96p per share this year, but dividend coverage (the ratio of earnings per share to dividends per share) is very low meaning that the payout doesn’t look sustainable.

One other thing to note with the dividend is that the company has an unusual policy. Going forward, it has said that it will return a minimum of 5% of net assets as an annual ordinary dividend, with a further 2.5% of net assets returned either as an ordinary cash dividend or via a share buyback.

Worth a look?

Putting this all together, the shares have their pros and cons. There are things to like, but there are also a lot of risks (share price weakness and dividend cuts).

Personally, I see them as too risky. But they could be worth considering if an investor has a long-term mindset and a high risk tolerance.

The post Down 26% in 2026 and offering a yield of 9.6%, are Taylor Wimpey shares a smart choice for an ISA or SIPP? appeared first on The Twelfth Magpie.

Dividend distress

For those unfamiliar with the term, dividends are cash payouts made by some companies to their owners (shareholders). However, not all listed businesses pay dividends. Some companies make losses and therefore lack spare cash to distribute. Other firms prefer to reinvest their current profits to stimulate future growth.

Another problem is that future dividends are not guaranteed. During times of trouble, they can be cut or cancelled at short notice. Indeed, this happened repeatedly during the Covid-19 pandemic of 2020/21.

Though most member companies of the elite FTSE 100 index do pay dividends, that’s not the case in the FTSE 250. Nevertheless, my family portfolio is packed with dividend-paying stocks from both indexes. What’s more, I’m always looking out for new dividend dynamos to add to our existing holdings.

Taylor made?

Shares in British housebuilder Taylor Wimpey (LSE: TW.) offer one of the FTSE 350’s highest dividend yields. Yet I can’t help thinking that this flood of cash might slow to a trickle.

As I write, Taylor Wimpey shares trade at 78.9p, valuing this group at under £2.8bn. That’s pretty big for the FTSE 250, but nowhere near big enough to join the FTSE 100. And on Tuesday (28 April), the share price plunged as low as 78.45p — levels not seen since early 2013 (13 years ago). Yikes.

At these lowly levels, this stock offered a trailing dividend yield nearing 9.7% a year. At first glance, this seems like a rich reward for buying and patiently holding these shares, but this juicy payout is unlikely to continue.

Tough times

In a trading statement released yesterday, Taylor Wimpey reported lower weekly sales of new homes, plus an order book 5% lower at £2.2bn. Also, the US-Iran war is likely to push up building costs later this year, further crimping Taylor Wimpey’s profit margins.

The final dividend has just been cut from 4.66p in 2025 to 2.95p in 2026. With this saving, the company will buy back more of its own shares. Perhaps not a bad idea, given their lowly rating? The firm may also reduce its interim dividend for this financial year, slashing that near-10% yearly yield to something more affordable.

I’ve debated buying Taylor Wimpey shares many times in 2025/26. I’m glad I held off, as this stock is down 9.7% over one month and 27% over six months. It’s also plunged 32.7% over one year and crashed 55.9% over five years. (All returns exclude dividends.)

For me, this episode confirms one market lesson I know only too well from experience. Market-beating dividend yields can sometimes be horribly undermined by steep share-price falls. That’s why I tend to avoid stocks with stagnating or unsustainable dividend payouts. In short, what I gain in one hand, I can sometimes lose from the other!

The post Prediction: this FTSE 250 10% dividend yield is doomed! appeared first on The Twelfth Magpie.

Delicious dividends

There are many ways to earn passive income outside of work. These include renting out property, earning savings interest, collecting coupons (interest) from bonds, plus state and other pensions.

Fearing the hassle of being a buy-to-let landlord, I’ve never owned investment properties. Likewise, I know no-one who got rich purely from sitting on cash. (This reminds me of a Russian proverb, “Those who take no risks, drink no Champagne.”)

For me, dividends are the easiest form of ‘free money’. These regular (or one-off) cash payments are paid by some companies to their shareholder owners. Alas, most London-listed businesses don’t pay dividends.

Also, future dividends are not guaranteed, so they can be cut or cancelled at short notice. This happened often during 2020/21’s Covid-19 crisis. Then again, the London stock market’s dividends are rising and could hit a record high this year, beating 2018’s total.

£98bn for the taking

According to estimates, members of the FTSE 100 index could pay dividends totalling £88bn in 2026. Another £10bn might come from other members of the wider FTSE All-Share index. In short, millions of investors in UK shares will claim their share of this £98bn of passive income.

Currently, this huge sum works out to 3.5% of the FTSE All Share’s market valuation of £2.8trn. That’s one of the highest cash yields on offer from major stock markets. This is why my family portfolio is packed with income-generating FTSE 100 and FTSE 250 stocks.

The simplest, cheapest way for investors to collect this passive income — plus capital gains as share prices rise — is to invest in a low-cost index tracker. The cheapest FTSE All Share-tracking funds charge fees of just 0.06% a year. That’s just 6p per £100 — far less than active and managed funds typically charge (and these managers usually underperform their benchmarks).

A 9.1% yield

One FTSE 250 share always crops up in my high-dividend search: Taylor Wimpey (LSE: TW). This British housebuilder’s sales have suffered since interest rates rose steeply in 2022/23. Furthermore, its key rivals have slashed their dividend payments and are buying less land to develop.

On Friday, 24 April, Taylor Wimpey shares closed at 83.98p, valuing the group at under £3bn. That’s just 1.9% above the 52-week low recorded earlier that day. This stock has dived 27.1% over one year and crashed 53.6% over five years (excluding dividends).

After these price falls, this FTSE 250 share offers a tempting dividend yield of nearly 9.1% a year. That’s triple the FTSE 100’s cash yield of 3% a year. Yet, I worry that Taylor Wimpey, like its competitors, might decide to cut this cash payout. After all, current profits do not cover this outflow, forcing the firm to dip into its cash reserve of £350m.

For now, this stock will not join my buy list. Indeed, if the UK housing market weakens in 2026/27, things could get worse for Taylor Wimpey and its cohort. Who knows, I might even steer clear until falling interest rates inject new life into property prices!

The post Anyone can claim a share of this £98bn of passive income! appeared first on The Twelfth Magpie.

Taylor Wimpey‘s (LSE:TW) a great example. The stock stands out in an industry known for high dividend yields – but that’s not necessarily a good thing.

Passive income

A lot of UK housebuilders have dividend yields above the FTSE 100‘s 3.35% average. But Taylor Wimpey really is something else.

It’s also been the most consistent. Barratt Redrow, Bellway, and Persimmon have all cut their dividends in the last few years. From a passive income perspective, that’s pretty attractive. But investors have to ask what’s going on?

Does the company have a magic money tree, or is there something else we need to know? That’s the big question.

Where’s the money coming from?

In a 2023 interview, Charlie Munger said the following about Warren Buffett’s investments in the Japanese trading houses:“‘It was like having God just opening up a chest and pouring money into it. It’s awfully easy money.“

Taylor Wimpey’s high and apparently sustainable dividend might look like this. But the reality’s a bit different. The high yield and the consistency come from the firm’s unique dividend policy. It returns cash based on its assets, not its free cash flow.

That means much greater stability in downturns when profits are low. But it does come at a cost for shareholders. 

What’s the catch?

Imagine having a savings account with £10,000 that pays 3% AER interest. You have to decide how much to take out each month as income. One option is you can take out the interest. In that situation, you’ll get £24.66 a month. 

Alternatively, you could withdraw a fixed percentage of the balance. Suppose you decide on 5%, for example. That way, you get £51.23, which is obviously more. But you don’t make more money — your account balance just goes down.

The situation’s the same with Taylor Wimpey. Investors get more income, but it comes out of the business they own.

So what?

No company has a magic money tree. In Taylor Wimpey’s case, the effects of its dividend policy have been showing up elsewhere. If you take out more money from a savings account than you make in interest, your balance goes down. And if a firm pays out more than it brings in, its book value goes down.

That’s what has been happening with Taylor Wimpey. And it’s why the share price is down 54% in the last five years.

That means investors have ultimately gone nowhere on a total return basis. And this is the catch with the high dividend yield.

None of this makes Taylor Wimpey any worse than the other UK housebuilders. But it does provide some important context.

An important change

Taylor Wimpey’s making a change to its capital allocation policy. It’s moving to a mix of dividends and share buybacks. With the share price down, I think that makes a lot of sense. It could help make the high yield much more sustainable in future.

Taylor Wimpey’s a stock I keep on my radar. But it’s not my preferred name in the housebuilding sector at the moment.

The post 8.97%! Why do Taylor Wimpey shares always have such a high dividend yield? appeared first on The Twelfth Magpie.