Is Taylor Wimpey plc's 8% dividend yield the steal of the century?

With a dividend yield of around 8%, housebuilder Taylor Wimpey(LSE: TW) appears to offer strong income potential. At a time when inflation is now less than 3%, the company could become increasingly popular among income investors.

Certainly, the housebuilding sector is experiencing an uncertain period. But the company could offer sustainable dividend growth over the medium term thanks to favourable trading conditions and a solid financial standing. But does it have more investment appeal than its index peers, including this dividend growth stock which released upbeat results on Thursday?

Sustainable growth

While the prospects for the UK housing market are difficult to predict due to Brexit uncertainty, the outlook for housebuilders remains positive. Although house prices have fallen in some parts of the UK, notably in London, the market for new-build houses remains buoyant.

It has been boosted in recent years by favourable government policy. Instead of seeking to dramatically increase the number of houses being built, the government has sought to make it easier for first-time buyers to get onto the property ladder. Policies such as Help to Buy and stamp duty relief are encouraging demand to remain high for new-build houses. With those policies set to remain in place over the medium term, they could create favourable trading conditions across the sector.

Dividend potential

With Taylor Wimpey's dividend yield being around 8% per annum, the company appears to have a bright income investing outlook. Its shareholder payouts are covered around 1.4 times by profit. This suggests that they are sustainable at their current levels and may generate inflation-beating growth in the next few years. Profit growth of 4-5% per year in the next two years could provide a catalyst to dividend growth.

Since the stock trades on a price-to-earnings (P/E) ratio of just 9, it seems to offer a wide margin of safety. Therefore, while not a popular stock, it could prove to be a highly profitable investment for the long term.

Strong performance

Also offering dividend investing potential is home repairs and improvements business Homeserve(LSE: HSV). Its trading update on Thursday showed a continuing strong performance. Adjusted profit before tax for the 2018 financial year is expected to be in line with market expectations and significantly ahead of the previous year's figure of £112.4m.

Looking ahead, Homeserve is forecast to post a rise in earnings of 10% in the current financial year, followed by further growth of 12% next year. This is set to stimulate dividend growth, with shareholder payouts expected to rise by 22% over the next two years. Although this leaves the company on a dividend yield of just 3% next year, since payouts to shareholders are due to be covered 1.8 times by profit they could continue to rise at a rapid rate.

As such, after a strong performance in the 2018 financial year, Homeserve seems to offer impressive income prospects. Its price-to-earnings growth (PEG) ratio of 1.5 also suggests that it may offer a wide margin of safety.

Buy-And-Hold Investing

Our top analysts have highlighted five shares in the FTSE 100 in our special free report "5 Shares To Retire On". To find out the names of the shares and the reasons behind their inclusion, simply click here to view it immediately with no obligations whatsoever!

Peter Stephens owns shares of Taylor Wimpey. The Motley Fool UK has recommended Homeserve. 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.