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I had a shock this morning when I checked my SIPP and saw the Taylor Wimpey (LSE: TW) share price had fallen by 4.7%. It wasn’t results day for the FTSE 100 housebuilder but then I remembered, it had gone ex-dividend.
When companies pay a dividend, the share price typically drops to reflect the cash leaving the business. With a stock like this, offering one of the highest trailing dividend yields on the FTSE 100 at 9.43%, the impact can be notable.
A sky-high yield like this one is hugely tempting, but it can also be a warning sign. Yields automatically rise when the share price falls, so it can be a sign of a company in trouble and investors need to tread carefully. Taylor Wimpey shares have fallen by 35% in the last year. And at just over 100p today, they’re roughly half the 200p they traded at 10 years ago.
The housebuilding sector has struggled since crashing around 40% after the Brexit vote in 2016. Rising interest rates, the cost-of-living crisis, higher construction costs and stretched affordability have all weighed on construction firms.
Solid, if cautious, results
Taylor Wimpey’s latest results, published on 1 October, showed the board expects 10,400 to 10,800 UK completions this year and an operating profit of £424m, slightly up from £416.2m in 2024. The total order book was flat at £2.12bn, with 73% of the 7,223 planned homes now exchanged.
What Taylor Wimpey really needs is lower interest rates to revive the wider economy and bring buyers back. There’s a potential secondary benefit. Falling rates should also make high-yield dividend stocks look more attractive compared with cash and bonds. Let’s not get too excited though, the Bank of England is still concerned about inflation, and won’t be in a hurry to hand out further interest rate cuts.
With a price-to-earnings ratio of 12.5, the stock looks good value to me. So much so that I actually topped up my stake a few weeks ago, to take advantage. Which means I’ll get even more income when the dividend payment hits my SIPP on 14 November.
Analyst optimism
Consensus analyst forecasts produce a median 12-month target of 132.5p, which suggests a potential 31.5% capital gain over the next year. Combined with the dividend, total returns could top 40%. I’d be a made man if that happened but I’m not getting carried away. It seems optimistic for such a short period.
That said, I still think the shares are well worth considering for long-term investors willing to ride through some short-term volatility. If wider economic conditions improve, there could be genuine growth ahead. But that feels like a pretty big ‘if’ right now.
Taylor Wimpey combines super-high income with patchy capital growth. But at some point, I think the growth is likely to come. The problem, as ever, is that we don’t know when. Recent history suggests investors may have to be patient, but at least they can keep reinvesting those dividends to take advantage of today’s downbeat share price. That’s my strategy, anyway.
