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Forget cash ISAs! I’d rather buy this dividend stock for its 8% yield

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Cash ISAs are finally paying halfway decent rates of interest but I’d still much rather invest in a top FTSE dividend stock instead.

While it is now possible to get 3% or 4% a year from a best buy Cash ISA, I can get double that income from housebuilder Taylor Wimpey (LSE: TW). Plus I also get the opportunity for capital growth on top, if its share price rises.

A nice juicy income stock

Better still, while the interest from my Cash ISA is free of tax, so are both my dividends and capital growth if I invest via a Stocks and Shares ISA. Over time, my total return should be greater, and so should my total tax saving.

Naturally, investing in shares is riskier. The Taylor Wimpey share price is trading 36.08% lower than five years ago, and is down 16.35% over the last year. That’s a clear capital loss.

There are two ways I offset this danger. The first is by investing in a spread of FTSE 100 stocks across different sectors and with differing risk profiles. That way if one or two underperform, others might over perform and compensate.

Secondly, I invest for the long term, by which I mean decades. That gives my stock picks plenty of time to overcome short-term setbacks. While I’m still working, I will reinvest all of my dividends to buy more stock. Any share price dips actually work in my favour, because my reinvested dividends buy up more stock as a result.

Today, Taylor Wimpey posted a decent set of full-year result for 2022, with profits before tax up 21.8% to £827.9m. Margins rose slightly to 20.9%.

It was a much more positive set of results than yesterday’s from rival housebuilder Persimmon, whose share price crashed 10% on news that management was cutting the dividend by 74%.

There was no talk of dividend cuts at Taylor Wimpey, which aims to pay out 7.5% of net assets or at least £250m a year. It says its dividend policy is stress-tested to withstand a 20% fall in house prices and 30% decline in volumes. We’re nowhere near that, at least not yet.

Portfolio building block

Taylor Wimpey’s current yield is exactly 8%, covered twice by earnings. It isn’t just one of the highest on the FTSE 100, it also looks pretty solid to me.

The stock is valued at just 6.3 times earnings, which reflects housing market anxiety, but gives me hopes of capital growth further down the line.

Naturally, uncertainty lies ahead. Taylor Wimpey said it started 2023 well but warned that its “reservation rate is significantly lower than in recent years, as affordability concerns weigh, particularly for first-time buyers”.

Completions dipped slightly from 14,302 to 14,154 last year. This year will be notably lower at between 9,000 and 10,500.

Investors took the news well with the share price down just 0.17% at time of writing. This confirms my view that Taylor Wimpey is a better use of my money than a Cash ISA. I’ll buy when I have some funds to spare.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

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Harvey Jones has positions in Persimmon Plc. 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.

Motley Fool UK 2023