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Investors aiming to earn a second income will find the UK stock market packed with dividend opportunities. Some FTSE 100 and FTSE 250 names have seen yields dip recently, while others have climbed.
But a rising yield isn’t always good news. Sometimes it reflects a company generously raising dividends, but other times it signals a sinking share price.
Taylor Wimpey‘s (LSE: TW.) been firmly in the spotlight this week. On 22 September, the housebuilder was relegated from the FTSE 100 to the FTSE 250 after its market value tumbled by more than 40% in the past year. It now sits at around £3.5bn. As the share price slid, the yield rose to nearly 10% – a level income investors might want to check out.
So is it worth thinking in the current climate, and how many shares would it take to generate £1,000 a month?
Doing the maths
Let’s crunch the numbers. To secure £12,000 a year in dividends at a 10% yield, an investor would need a £120,000 stake. With the shares priced close to £1, that works out at about 120,000 shares.
It’s not a small amount, but it’s possible to build towards it. For example, saving £500 a month could grow to £120,000 in roughly 11 years, assuming the yield stays consistent. With £300 a month, the same goal might take closer to 15 years.
Of course, all this rests on the assumption that the dividend continues to be paid at the current rate. And that’s where some red flags start to appear.
Dividend reliability
Taylor Wimpey’s latest half-year results showed earnings falling 65% compared to last year, reflecting the broader weakness in the UK housing market. More concerning is the dividend payout ratio, which has ballooned to about 388%. This means it’s returning far more cash to shareholders than it generates in earnings – something that can’t last forever.
That suggests the dividend is at real risk of being cut unless profits rebound. For income-focused investors, that’s a major factor to weigh up.
On the other hand, Taylor Wimpey’s balance sheet is in decent shape. With £6.25bn in assets, comfortably ahead of liabilities, the company doesn’t appear to be in immediate danger. Should the housing market recover, the stock’s depressed valuation could look attractive and prompt a significant turnaround.
Balancing the portfolio
For those chasing a second income, Taylor Wimpey’s certainly a stock to consider. But I think it should only form part of a broader basket of dividend shares. Relying on a single company in a cyclical sector’s risky, especially when payouts already look stretched.
A more balanced approach is to spread funds across 10-20 dividend stocks, aiming for a steadier yield in the 6%-7% range. That way, the portfolio is less vulnerable to swings in any one industry.
Taylor Wimpey might be tempting at today’s levels, but investors should weigh up the risks carefully. For me, it’s an interesting addition to think about, rather than a core holding for a reliable second income.
This story originally appeared on Motley Fool
