8.8% yield but down 15%, should I buy more of this FTSE 100 income gem now?

Income is the closest thing to disproving the old adage that there is no easy money. The only effort required to generate it is to pick the right stocks to generate regular dividend payments.

These profits are reinvested in stocks in my opinion, as this effectively charges income over time. This can provide an extremely comfortable retirement – and an early one, if done right.

One firm in my current income portfolio looks worthy of an additional investment from me: Taylor Wimpey (LSE: TW).

Why is this?

The main reason is its current yield and dividend forecast – this is the point of the stock for me after all.

In 2024, the housebuilder paid a dividend of 9.46p, yielding a dividend yield of 8.8%. The risk in this case is the rising cost of living which may reduce the demand for housing. However, the consensus forecast of analysts is that its dividend yield will remain above 8% per year until the end of 2028.

This is more than double FTSE 250Current average yield of 3.5%, and FTSE 100It’s 3.1%.

The next reason seems very negligible to me – 22% in fact, using discounted cash flow (DCF) analysis. The DCF model of other analysts is more powerful than mine. However, based on an 8.8% discount rate for expected future cash flows, my DCF modeling suggests a ‘fair value’ of £1.38. Since share prices can trade up to their fair value over time, this increases my chance of making money if I ever want to sell the stock.

And the last reason is that both of these factors – the increase in the yield and the share price – are supported by strong forecasts of income growth. Analyst consensus is that Taylor Wimpey’s earnings will grow by 29.3% annually through 2028.

And growth here ultimately increases any company’s profits and share price over time.

What is the income?

My £20,000 held in Taylor Wimpey would make me £28,063 in passive income after 10 years and £257,577 after 30. I use this timeframe as it is often considered a typical investment cycle for long-term investors. It includes about 20 initial investment concepts and about 50 early retirement options. But I have to accept that a lot can change in 30 years so none of this is guaranteed.

These calculations assume that the dividends are reinvested in the stock to take advantage of the ‘dividend compounding’ effect. This is like leaving savings to grow in a bank account and has the effect of overcharging on profits.

The current dividend yield of 8.8% is used as a base rate, although payouts can go up and down over time.

At the end of the 30 year period, my £257,577 holding in Taylor Wimpey and my original £20,000 stake would pay me an income (from dividend payments alone) of £24,427!

My investment idea

I bought my position in Taylor Wimpey based on its strong earnings growth potential. These are the main drivers of any company’s dividend yield and share price going forward.

Since nothing has changed here, I will buy some shares soon and think they are worth considering for other investors.