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8.3% yield! But is the Taylor Wimpey dividend forecast equally tempting?

a couple embrace in front of their new home

Housebuilder Taylor Wimpey (LSE: TW) announced this month that it is boosting its annual dividend by 9.6%. That lifts it to 9.4p per share, which at the current share price equates to an 8.3% yield. That certainly attracts my attention – but is the Taylor Wimpey dividend forecast as appealing?

Dividend volatility

Housebuilders often have quite volatile dividends.

When the housing market does well, they can generate a lot of free cash flow. Some might be used to buy land, but beyond that there are often limited uses for the cash inside the business, so it is paid out as dividends. When house prices crash or sales volumes fall (often those two things go together), dividends can be cut sharply or cancelled altogether.

Before the pandemic, for example, the annual Taylor Wimpey dividend was 16.9p per share. But in 2020 it slashed its payout and raised funds by issuing new shares, diluting existing shareholders.

It was a similar story during the financial crisis in 2008. The share price had tumbled over 85% in a year and the company tried but failed to raise half a billion pounds in a rights issue. The annual dividend of 15.8p was scrapped. In other words, even after this month’s generous increase, the dividend is around 40% lower than it was back in 2007.

Taylor Wimpey dividend forecast

But while it may have cut its dividend severely before, that does not necessarily indicate what the next few years hold for the company’s shareholders.

Basic earnings per share of 18.1p last year mean that the dividend was amply covered. Even if earnings are flat rather than rising, the Taylor Wimpey dividend could keep growing substantially for years to come.

The company generated positive free cash flow of £29m, after paying out £324m in dividends and spending £151m buying back shares. That is sustainable if earnings stay at their current level. Even if they fall, it may be possible for the dividend to be maintained or increased, by stopping share buybacks.

What about the Taylor Wimpey dividend forecast? The company’s stated aim is to “provide an attractive and reliable income stream to our shareholders, throughout the cycle including during a normal downturn, via an ordinary cash dividend”. It tries to pay out 7.5% of net assets or at least £250m annually throughout the economic cycle. It reckons it can do this if house prices fall less than 20% and sales volumes decline by under 30%.

In practice, I have my doubts about whether the firm would pay the same dividend if things got that bad, or seek to preserve cash instead. For now, although the company says that, “the weaker economic backdrop continues to impact the near-term outlook“, it remains upbeat about sales prospects. If the housing market does not get dramatically worse, I expect the Taylor Wimpey dividend this year to be at the same level or higher than last year.

That depends on the health of the housing market, though. Longer term that is difficult to assess. A severe drop in selling prices could mean a dividend cut. For now, I have no plans to purchase the shares.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.