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FTSE homebuilder Taylor Wimpey (LSE: TW) paid a dividend last year of 9.46p. This gives a standout dividend yield of 9% on the current share price of £1.05.
By comparison, the current average yield for the FTSE 100 is 3.3% and for the FTSE 250 it is 3.5%.
The firm’s dividend yield is also double the ‘risk-free rate’ (the 10-year UK government bond yield) of 4.4%.
Looking ahead, consensus analysts’ forecasts are that Taylor Wimpey’s dividend yield will remain above 8% until 2027.
How much passive income?
Passive income is money made with minimal effort, most fittingly, in my view, from stock dividends.
In Taylor Wimpey’s case, a £20,000 investment at a 9% yield would make £29,027 after 10 years.
That number requires the dividends paid out being immediately reinvested back into the stock.
This is a standard investment practice known as ‘dividend compounding’. It is a similar idea to leaving interest to accrue in a bank savings account.
On the same basis, after 30 years the dividend amount would increase to £274,612.
Adding in the initial £20,000 investment would give a total value to the holding of £294,612.
And this would pay an annual dividend income of £26,515 at that point!
How does the core business look?
Any firm’s dividends – and share price — ultimately rise on the back of earnings growth.
I think a risk to these is any further surge in the cost of living that may deter people from moving home. On the other side of the demand-supply equation, another risk is any significant shortfall in the government housebuilding plan. This targets the building of 1.5m homes within its five-year term.
However, for Taylor Wimpey, analysts forecast its earnings will rise by a stellar 35% a year to end-2027. And Chancellor Rachel Reeves announced on 11 June another £10bn to be spent on new houses.
The firm’s recent results also look broadly positive to me.
Its H1 2025 numbers saw a 9% year-on-year rise in revenue to £1.65bn and an 11% jump in home completions to 5,264.
Its operating profit dropped 11.7% to £161m, but this was due to a one-off factor. Specifically, it was a £20m charge to remedy historical defective workmanship by a contractor at one of its sites.
Looking forward, the firm reiterated guidance of 10,400-10,800 UK completions range this year compared to 9,972 in 2024.
My investment view
I bought Taylor Wimpey shares after the H1 results, based on its very strong earnings growth prospects and ultra-high dividend.
I believe the former should continue to power the latter higher in the years to come.
It should also do the same for the share price, which would be useful if I ever wanted to sell the stock.
As for how high it might rise, my experience tells me that all assets tend to converge to their fair value over time.
And the best way I have found of ascertaining this value is through discounted cash flow analysis.
The DCF for Taylor Wimpey shows its shares are 70% undervalued at their current £1.05 price.
Therefore, their fair value is £3.50.
All in all, I am extremely happy I bought the stock and will buy more soon.
