5% dividend yield! Should I buy this cheap FTSE 100 income stock?

With signs that many people want to keep working from home and interest rates remaining at record lows, the UK housing market has exploded in 2021. From this, we might assume that the share prices of FTSE 100 housebuilders have been racing ahead in tandem. Sadly for holders, that’s not been the case.

Taylor Wimpey (LSE: TW) is a great example. Year-to-date, its stock has gone nowhere. That trend has continued today, despite the company issuing what I regard as an encouraging update on trading. Is this a great opportunity for me to snap up this cheap dividend stock? 

On target

Like top-tier rival Persimmon earlier this week, Taylor Wimpey said that it had seen robust demand from customers. A sales rate of 0.91 homes per outlet per week has been logged in the second half of its financial year so far. For the year-to-date, this rises to 0.95. 

Despite facing a “competitive” market, TW also added nearly 5,500 plots to its short-term landbank during H2, bringing the total to approximately 84,000. Supported by a £2.8bn order book, it continues to target 17,000 to 18,000 competitions per year (and operating margin of roughly 21%-22%) in the medium term.

Looking ahead, the UK’s third-largest housebuilder said that it was still on track to meet existing guidance. Perhaps most positively for holders, the FTSE 100 member said that the rise in house prices had fully offset the increased cost of building homes. Despite a shortage of materials and drivers across the industry, the company also expects the situation to “gradually improve” from here.

Unfortunately, this wasn’t enough to impress the market.

Should I buy this FTSE 100 dividend stock?

Taylor Wimpey shares currently change hands at just 9 times forecast earnings. That’s cheaper than the aforementioned Persimmon (11 times earnings) but roughly on par with fellow FTSE 100 member Barratt Developments. However, one might argue that Persimmon’s higher returns on capital justify this slight premium. 

When it comes to dividends, however, I think Taylor Wimpey might be the pick of the bunch. A forecast 5.4% yield is lower than peers but analysts believe this will be better covered by profits. For me, the latter really matters. In my book, it’s better to be confident of receiving a smaller (but still chunky) payout over one that may prove too ambitious.

Naturally, it would be a bad idea for me to become dependent on any company for its dividends. This is particularly the case for housebuilders. Market conditions, mortgage availability and government schemes are currently favourable. But how long will this be the case?

A threat to the dividend could be especially problematic for TW owners considering that capital gains haven’t been stellar. Right now, TW’s stock is only 8% higher in value compared to where it stood five years ago. Surprisingly, that’s less than the gain made by the FTSE 100 as a whole.

Stay diversified

Notwithstanding this, I think there’s quite a lot to like here. As long as I remain diversified and hold other FTSE 100 dividend stocks from different sectors, I’d be comfortable building a position from today. This is assuming that generating income from my portfolio was my only priority. If not, I can think of a number of stocks that may offer a more balanced combination of capital growth and cash returns.     

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.