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

The cash ISA is finally paying a decent interest rate but I still prefer to invest above. FTSE dividend stocks instead.

While I can currently get 3% or 4% a year from the best Cash ISAs, I can get double that from a housebuilder. Taylor Wimpey (LSE: TW). In addition, I also get the opportunity to grow capital on top, if the stock price rises.

A nice juicy income stock

Even better, while the interest from my Cash ISA is tax-free, so are dividends and capital growth if I invest through a Stocks and Shares ISA. Over time, the total return should be greater, and so should the total tax savings.

Naturally, investing in stocks is more risky. The share price of Taylor Wimpey changed to +36.08% compared to yesterday. That is a clear capital loss.

There are two ways I balance this danger. The first is by investing in the spread FTSE 100 stocks in different sectors and with different risk profiles. That way if one or two underperform, the other can over perform and compensate.

Second, I invest for the long term, meaning decades. That gives stock picks more time to overcome short-term setbacks. When I am still working, I will reinvest all the dividends to buy more shares. Any share price dips actually work for me, because my reinvested dividends buy up more shares as a result.

Today, Taylor Wimpey posted its full-year results for 2022, with pre-tax profits up 21.8% to £827.9m. Margins increased slightly to 20.9%.

This is a more positive result than yesterday from rival housebuilders persimmonwhose share price fell 10% on news that management was cutting its dividend by 74%.

There is no talk of a dividend cut at Taylor Wimpey, which aims to pay out 7.5% of net assets or at least £250m a year. It said the dividend policy was stress-tested to withstand a 20% drop in house prices and a 30% drop in volume. We’re nowhere near that, at least.

Portfolio building blocks

Taylor Wimpey’s current yield is exactly 8%, covered twice by earnings. It is not only one of the highest in the FTSE 100, it also looks quite solid to me.

The stock is worth only 6.3 times earnings, which shows the anxiety of the housing market, but gives me hope of capital growth further down the line.

Naturally, uncertainty lies ahead. Taylor Wimpey says it’s off to a good start in 2023, but warns that “The reservation rate is lower than in recent years, due to concerns about affordability, especially for first-time buyers”.

Finished down slightly from 14,302 to 14,154 last year. This year it will be lower between 9,000 and 10,500.

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

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor does it become, any form of tax advice. Readers are responsible for conducting their own due diligence and seeking professional advice before making any investment decisions.