This top UK dividend stock yields an eye-catching 9.5%. That’s the highest on the FTSE 100. But it has problems too. The company in question is housebuilder Taylor Wimpey (LSE: TW) and its shares have plunged 40% in a year to trade at a 52-week low. With a price-to-earnings ratio of just 11.9 it looks priced to go. But be careful.

Taylor Wimpey shares are struggling

I bought the stock in 2023 with a long-term view, and I’m happy to hold on throughout the ups and downs. I have the compensation of dividends, even if I’m down overall. The board recently trimmed the interim payment from 4.8p to 4.67p, but the overall commitment to shareholders looks solid. It’s still promising to return around 7.5% of net assets annually, equating to at least £250m a year.

Guidance now points to a forecast yield of 9.13% in 2025 and 9.3% in 2026. While that’s slightly lower than today, it’s still a brilliant rate of income. Investors who favour high-yield dividend stocks will be tempted. They should also be wary.

Pressures remain

Inflation came in at 3.8% in July and could tick up to 4% in September. That will keep mortgages higher than we’d like, hitting buyer affordability and demand. Sticky inflation also raises Taylor Wimpey’s costs, while wages have also been climbing faster than prices, up 4.6% a year at last count. April’s increase to employers’ National Insurance and the minimum wage have further squeezed margins.

Last month’s results (30 July) revealed a £92.1m first-half loss. A £222m cladding provision was the main drag, but slowing completions also hurt. The board cut annual profit guidance by £20m as a result.

The group still expects to finish between 10,400 and 10,800 UK homes in 2025, a muted outlook given the government’s pledge to build 1.5m homes this parliament.

Tax policy could add to the pain. Rumours of new levies on higher-value properties in the Budget could hit sentiment. Unless they’re just rumours.

Long-term growth prospects

Investors considering whether to buy the shares need to do their homework. What I see is a good company having a difficult time. Taylor Wimpey is largely at the mercy of events beyond its control. Interest rates will have to fall, inflation ease and confidence return before housing demand strengthens. That could take time, but a yield of more than 9% pays handsomely while waiting.

We can’t expect an instant recovery. Housebuilders have struggled ever since they slumped in the aftermath of the 2016 Brexit vote. Ten years ago, the Taylor Wimpey share price hovered around 200p. Today, it’s just below 100p. So it’s dropped by half in that time. With that kind of underperformance, a high dividend isn’t enough.

For investors who understand and accept the risks, and can withstand more short-term turbulence, today could offer a brilliant entry point. I’ve taken a battering but console myself with the thought that my reinvested dividends will pick up more stock at today’s reduced price.

I think others might consider buying at this level, just don’t expect a smooth ride. If I’m feeling brave, I might even average down on my position.