According to City estimates, shares in homebuilder Taylor Wimpey (LSE: TW) will yield 11.6% in 2019, a fantastic level of income and one that is rarely seen for FTSE 100 companies.
Some believe that this level of income isn’t sustainable. I think this view is incorrect, and today I’m going to explain why.
Income champion
A few weeks ago, Taylor informed investors that despite increasing caution among UK homebuyers, it was on track to meet expectations for 2018 after completing 14,947 homes during the year, up 3%. And it doesn’t look as if the company will struggle to find new customers any time soon as customers are queuing up for new homes.
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At the end of 2018, Taylor’s order book value hit £1.8bn, up from £1.6bn at the end of 2017 — just under 50% of projected sales for the year. With surveys suggesting that the UK is building less than half of the number of new homes it needs every year, I reckon the order book will only continue to expand.
With around 50% of expected sales for 2019 already in the pipeline, it doesn’t look as if Taylor’s sales will decline over the next 12 months. Management has already guaranteed that the group will be paying out £600m to investors via dividends in fiscal 2019, which is virtually all of its year-end 2018 cash balance of £644m. However, as the company books an operating profit margin of just over 20% on its homes, I reckon Taylor will be able to refill its coffers quite quickly.
So overall, I reckon the 11%+ dividend yield is here to stay and if you’re looking for income, I highly recommend considering adding this business to your portfolio.
Rebuilding a reputation
Another income stock that I think has some attractive qualities is education publisher Pearson (LSE: PSON).
Pearson used to be one of the FTSE 100’s most dependable income stocks, but the company ran into trouble at the beginning of the last decade. It warned on profits five times between 2012 and 2017 and cut its dividend by nearly two-thirds in 2017.
Now, the business is trying to restore its reputation. So far, the turnaround seems to be going to plan. Today the company announced that it is on track to report operating profits of between £540m and £545m for 2018, slightly above analyst forecasts. Management also thinks the firm has the potential to produce as much as £640m in operating profits for 2019. Also, net debt is expected to have halved in 2018, falling to about £200m from £432m in 2017.
Dividend growth
These numbers indicate that Pearson is committed to restoring its reputation among income investors. The company is expected to distribute 19.5p per share for 2018, giving a prospective dividend yield of 2%. The return is expected to hit 2.2% in 2019.
These figures might not seem all that appealing, but with debt falling, and the company only paying out around one-third of earnings, there’s plenty of scope for dividend growth in the years ahead. It’s this future growth potential that excites me.
