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British housebuilder Taylor Wimpey‘s (LSE: TW.) share price has tanked recently. As a result, the dividend yield on the stock has climbed to around 10%.
Should investors consider buying the shares for this monster yield? Or is this a ‘dividend trap’? Let’s discuss.
Is this yield for real?
In the investment world, there’s no such thing as a free lunch. So with stock now sporting a yield that’s more than twice the FTSE 100 average, we need to look at the risks here.
Looking at the financials, the dividend coverage ratio (the ratio of earnings per share to dividends per share) immediately jumps out at me. Because it’s very low, signaling that the payout may not be sustainable.
This year, Taylor Wimpey’s forecast to pay out 9.18p per share in dividends. Yet earnings per share are only expected to be 8.32p. That gives us a dividend coverage ratio of just 0.91. Generally speaking, a ratio under one is a major red flag.
I’ll point out here that earnings per share for the first half of 2025 were only 3.2p. So getting to 8.32p for the year might be a stretch.
Inconsistent dividend payers
Another thing to be aware of is that housebuilders have a terrible track record when it comes to dividend consistency. Sure, these companies pay some big payouts when times are good. However, when times are bad, they typically cut their payouts or even cancel them entirely. Given this inconsistency, professional fund managers often steer clear of these stocks.
Zooming in on Taylor Wimpey, it cut its payout significantly in 2019, while it cancelled it completely between 2009 and 2011. So investors should definitely not rely on the dividend forecast here.
Experiencing challenges in 2025
Finally, investors should be aware that this company’s struggling at the moment. Recently, it reported a 12% drop in operating profit for H1 and cut its profit guidance for 2025. Drivers of the weak operational performance included inflation (higher staff and material costs), weak demand for new houses due to a lack of affordability, an unexpected charge (relating to principal contractor remediation works on a historical site), and planning delays.
As a result of this performance, City analysts have been lowering their earnings forecasts and price targets. This kind of activity can put pressure on a stock.
Worth a look?
Now despite all these issues, the stock could still be worth considering. In the short term, lower interest rates could help housing affordability. Meanwhile, in the long run, the fundamentals appear to be positive, with significant unmet demand for UK housing.
It’s worth noting that at the end of H1, the company had an order book of 7,269 homes. This was worth about £2.1bn.
I just think there are better (and safer) stocks to consider buying though. To my mind, buying this stock is quite risky due to the cyclical nature of housebuilding.
