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It’s always a good time to buy a top UK income stock in my view, but some times are better than others. I think that’s the case with housebuilder Taylor Wimpey (LSE: TW). It looks a brilliant buy to consider right now.
After a difficult run, the builder appears to be trading at bargain basement levels. It offers a ridiculously rate of high rate of dividend income, plus outsized capital growth prospects on top.
If forecasts are correct, it could deliver a total return of more than 50% this year. Of course, that’s a big if. Stock predictions must be taken with a mighty dollop of scepticism. Like weather forecasters, analysts can get it badly wrong.
They understandably find it particularly hard to predict hurricane-level events, global shifts that can shake markets to their foundations. Yet barring one of those, I think Taylor Wimpey is well set.
Can the shares recover from their recent beating?
I say that as somebody who holds the stock, and was having a high old time with it last year. Then everything went wrong.
I bought Taylor Wimpey because I expected interest rates to fall sharply in 2024, as most forecasters did.
Instead of the anticipated six base rate cuts, the Bank of England handed us just two. Forecasters now expect two at most this year. They could be wrong again, of course, but that expectation is influencing investor behaviour.
Higher interest rates hit dividend income stocks like Taylor Wimpey. That’s because they allow investors to get a decent inflation-beating return from cash and bonds, without risking their capital.
Taylor Wimpey certainly has risks. House prices remain a stretch, especially for young buyers. Resurgent inflation could drive up the cost of materials and labour, squeezing margins. April’s employer’s national insurance hikes won’t help.
Its shares have fallen by more than 30% in the last three months. Over one year, they’re down 25%.
While the stock now offers a blockbuster trailing yield of 8.69%, investors are still badly down over the last year. I’m disappointed, but not worried. I don’t buy shares with a one-year view.
I plan to hold my Taylor Wimpey shares for years, and with luck decades. That should give its share price plenty of time to recover, and plenty of time for my reinvested dividends to compound and grow.
That’s a stunning dividend
Despite its troubles, Taylor Wimpey has actually performed quite well lately. It now plans to build up to 10,000 ‘units’ over the next year.
Higher interest rates have driven up mortgage rates, making life harder for buyers, but given today’s shortages the housing market remains buoyant.
I like buying shares at reduced valuations. It gives me an extra margin of safety. Taylor Wimpey looks staggeringly cheap, trading at just 11 times earnings. That’s well below the FTSE 100 average of more than 15 times.
The 16 analysts offering one-year share price forecasts have produced a median target of just over 160p. If correct, that’s an increase of a stunning 45% from today’s price of 110p per share (like I said, no guarantees).
In a further vote of confidence, 10 out of 16 analysts rate Taylor Wimpey a Strong Buy. I already hold a big stake so won’t buy more, but I can see why other investors would consider it.
