Image source: Getty Images
A handful of depressed UK shares have been growing in popularity with passive income investors in June and July, and some of them offer stunning dividend yields.
Taylor Wimpey (LSE: TW.) is one as forecasts put its dividend yield for the full year at a scorching 9.8%. A big yield like that can mean one of two things, however. The stock might simply be too cheap… or the annual payment could be at risk of being cut. I’m firmly on the optimistic side, and I’ll explain why.
Share price rebound?
The above chart shows how badly Taylor Wimpey shares have lagged the FTSE 100 over the past five years. And it’s for good reason. Inflation and interest rates have hammered housing demand, and that’s had a big impact on the whole sector.
But the housebuilding industry has a knack of bouncing back to impressive long-term strength — and rewarding investors who have the courage to buy when the shares are cheap. It’s done it every time I can remember, and I’ve profited several times from rebounds.
CEO Jennie Daly recently spoke of the “uncertain macro backdrop,” while telling us Taylor Wimpey sales were steady. But crucially, she added:
With highly experienced teams, a high-quality landbank and a healthy balance sheet, we remain focused on delivering growth over the medium term and value for all our stakeholders.
CEO Jennie Daly, AGM
That’s the key!
The boss mentioned the two vital things that I want in a housebuilder when it’s looking like an undervalued passive income bargain. That’s quality land assets, and a strong balance sheet. I saw that same brilliant combination during the previous housing crisis with Persimmon, and I did well out of that. And I really think we could have the same opportunity again here.
First-half results are due on 31 July when I think potential investors should focus on two things. One is Taylor Wimpey’s sales trend in the first half of the year and projections for the full year. As long as it’s steady, I’ll be happy.
The other is liquidity, after the company ended 2025 with net cash of £342m. That was, however, 39% down from the end of the previous year. And it does expose a risk we need to consider. The balance sheet looks just fine to me now. But it needs to hold up until housing demand gets back in the swing.
In a nutshell
Here’s how I’d summarise Taylor Wimpey shares. First, on the plus side…
- Very attractive dividend yield.
- Healthy cash balance.
- Long-term sector strength.
And against that…
- Very real economic threats.
- Still need to watch that cash.
Are there any investors I think should consider staying away? Yes, those with an investing horizon of less than five years. I’d rate the potential short-term sector volatility as too risky.
For investors with a long-term view? It’s definitely one to consider, in my view. I probably won’t buy myself, partly because I already own shares in the sector. But I’m also drawn to some other great passive income opportunities I see out there…
What income stock do we like better than Taylor Wimpey Plc right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at an income share we think is worth your time.
Alan Oscroft owns shares in Persimmon.
This story originally appeared on Motley Fool
