The Income Investor: prospects for Taylor Wimpey and Persimmon

Falling share prices can present buying opportunities for income-seeking investors. Indeed, the inverse relationship between stock prices and dividend yields means that the potential rewards from income investing opportunities may be at their most appealing following a sharp decline in a company’s share price.

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At the same time, though, few stock prices slump without good reason. For example, a tough economic outlook, unfavourable industry prospects or even weak company fundamentals can all contribute to a sudden deterioration in investor sentiment towards a firm’s shares. This can equate to a higher risk of not only capital loss, but also that dividends will fail to grow, or even be maintained, at their current level.

Interest rate expectations

This trade-off between risk and potential reward is particularly pertinent for income seekers at present. Although the FTSE 350 index trades down just 5% since the war in Iran started, the prices of many interest rate sensitive stocks have fallen heavily since the end of February.

Having declined from 5.25% to 3.75% between August 2024 and February 2026, UK interest rates were widely expected to continue their downward trend. After all, the Bank of England stated in its February Monetary Policy Report that it expected inflation to meet its 2% target in April. Moreover, the lacklustre performance of the UK economy in recent months meant that further monetary policy stimulus was deemed highly likely.

But war in the Middle East has fundamentally changed the outlook for interest rates. Higher energy prices are set to prompt a renewed period of elevated inflation that is likely to, at the very least, prevent further interest rate cuts from being implemented over the coming months. Indeed, it could lead to interest rate rises before the end of the calendar year.

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Higher borrowing costs could have a hugely detrimental impact on the economy’s performance. For example, they may weigh on wage growth, employment levels and negatively affect GDP growth over the medium term. This may lead to tougher trading conditions for a wide range of firms that hurts both their profitability and capacity to make shareholder payouts, hence their severe recent share price declines.

Sound fundamentals

Many income investors may naturally determine that any stock which is heavily dependent on interest rate changes should presently be avoided. However, in some cases, their falling share prices and subsequently higher yields could mean that their potential rewards outweigh their recent spike in prospective risks.

Indeed, the scale of share price falls among some interest rate sensitive stocks means that their yields are significantly higher than the FTSE 350 index’s 3.1% figure. Furthermore, their balance sheets and competitive positions may mean they are able to not only overcome a potentially challenging operating environment, but improve upon their market position to generate higher returns as more sanguine trading conditions return over the long run.

In addition, some large and mid-cap UK stocks that are highly dependent on interest rate changes have substantial dividend cover. This means that shareholder payouts are likely to remain affordable despite the presence of elevated risks. As a result, their high yields may provide a relatively dependable income stream for investors.

Source: Refinitiv as at 7 May 2026. Bond yields are distribution yields of selected Royal London active bond funds (as at 5-6 May on Trustnet), except the global infrastructure bond which is 12-month trailing yield for iShares Global Infras ETF USD Dist as at 6 May. SONIA reflects the average of interest rates that banks pay to borrow sterling overnight from each other (5 May). Best accounts by moneyfactscompare.co.uk refer to Annual Equivalent Rate (AER) as at 7 May and which exclude bonuses.

Making assumptions

Of course, all the above discussion assumes that energy prices will continue to rise, inflation will surge and interest rate increases are inevitable. However, geopolitical risks in the Middle East are highly fluid. If the situation eases, in terms of a lasting peace deal for example, the outlook for interest rates and the wider economy could rapidly change.

Similarly, it is unknown how the Bank of England will react to any rise in inflation. It may take the view that fast-paced price rises need to be addressed via several interest rate increases. Or it could determine that higher inflation is likely to be temporary, thereby maintaining its current monetary policy stance.

Income seekers, therefore, should not assume that interest rate rises are inevitable. And by selecting stocks with relatively high potential rewards and sound fundamentals, they may be able to capitalise on recent share price falls to obtain favourable risk/reward opportunities on a long-term view.

Housebuilders

The share prices of housebuilders Persimmon (LSE:PSN) and Taylor Wimpey (LSE:TW.) have fallen by 27% apiece since the Iran war began at the end of February. They are highly sensitive to interest rate changes due to the close link between monetary policy and mortgage rates.

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Indeed, interest rate rises that lead to higher mortgage costs would be expected to reduce demand for new homes due to affordability issues. This would negatively affect both firms’ financial performance. In addition, higher inflation caused in part by rising energy prices could prompt elevated build cost inflation that squeezes profit margins across the sector.

Persimmon

Clearly, recent share price falls for both companies could realistically persist in the short run. In the long term, though, they could offer an attractive risk/reward opportunity for income-seeking investors.

In Persimmon’s case, its dividend yield of 5.5% is 240 basis points higher than the FTSE 350’s income return. Moreover, its shareholder payouts were covered almost 1.7 times by net profits in its latest financial year. This suggests that its dividends could prove to be relatively sustainable even amid a potentially tough period for the housebuilding sector.

The company’s financial position further indicates that it is well placed to overcome near-term economic uncertainty. For example, it had a net cash position of £117 million at the end of its 2025 financial year. It also has a land bank in excess of 84,000 plots which suggests it has a strong competitive position.

Although capital gains may not be a priority for income-seeking investors, Persimmon’s price-to-book (PB) ratio of just under one suggests it has upward rerating potential. Alongside its income investing appeal, as well as a forecast annualised rise in earnings per share of 7% over the next two financial years, this could provide a highly worthwhile total return over the coming years.

Taylor Wimpey

Similarly, Taylor Wimpey appears to offer a relatively appealing income opportunity on a long-term view. Following its aforementioned share price fall, the company now yields 9.3%. This is three times the income return of the FTSE 350 index.

The firm recently updated its dividend policy. Previously, it aimed to pay 7.5% of net assets, or at least £250 million, as a dividend each year. However, it now aims to pay out 5% of net assets, with a further 2.5% to be used either to buy back shares or pay an additional dividend, with the overall minimum distribution still being £250 million.

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Given the company’s lowly market valuation, a share buyback could be a prudent use of excess cash. Indeed, Taylor Wimpey’s shares currently trade on a PB ratio of just 0.7. This suggests there is scope for a substantial upward rerating that could equate to significant share price growth.

In terms of its financial position, meanwhile, the company’s net cash position of £342 million suggests it is well placed to overcome the potential impact of prospective interest rate rises on the wider economy and housebuilding sector.

Risk/reward ratio

Clearly, both Taylor Wimpey and Persimmon’s share prices could prove to be highly volatile in the short run. Their sensitivity to interest rate changes means they may face challenging trading conditions in the coming months should inflation rise and the Bank of England decide upon a tighter monetary policy.

However, that outcome is by no means guaranteed. Moreover, the relatively high yields, sound finances and modest market valuations of both stocks suggest that, overall, they could prove to be relatively favourable income opportunities for the long run. 

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.