These stock market buy-to-let investment companies offer 5%+ yields

G A Chester highlights an easy way to invest in the buy-to-let sector and the value of diversifying your income stream with other 5%+ dividend yields.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Buy-to-let has become increasingly problematic for smaller ‘hobby’ landlords. Voids and unexpected costs have always been a drag on rental income and can have a disproportionate impact on those with only one or two properties — as this horror story from my Foolish colleague Alan Oscroft demonstrates.

However, more recently, tax changes and the introduction of stricter lending criteria have provided further reasons for many buy-to-let landlords and aspiring landlords to wring their hands in frustration. The result? Figures from Shawbrook Bank show the proportion of buy-to-let mortgages completed by individual landlords has fallen from 68% in the first half of 2015 to 34% in the first half of 2018. Meanwhile, over the same period, the proportion completed by limited companies has doubled from 32% to 64%.

The sector remains attractive for those operators with scale and professionalism, but how can the rest of us profit? Well, there’s a dead easy way. We can buy shares in two real estate investment trusts that listed on the stock market last year: Residential Secure Income (LSE: RESI) and PRS REIT (LSE: PRSR). Once fully invested, the former is targeting a dividend yield of 5% a year and the latter a yield of at least 6%. Thereafter, both companies expect to increase their annual dividends broadly in line with inflation.

On offer right now

Residential Secure Income raised £300m in its initial public offering (IPO) and a further £250m early this year. It focuses mainly on retirement housing, and shared ownership housing, as well as leasing housing to local authorities for the vulnerable.

PRS REIT raised £250m in its IPO. Its focus is on newly-built rental homes, mainly for families, in areas near key centres of employment, with convenient access to transport infrastructure, and close to good primary schools.

I believe it’s worth buying both stocks, because together they provide good diversification across various residential housing sub-sectors. Furthermore, I believe they’re worth buying right now. This is because those target yields I mentioned earlier are based on their IPO share prices of 100p. Both stocks are currently below that level, meaning investors today are locking in higher initial yields than the targeted 5% and 6%.

Diversification

The beauty of the stock market is that you can diversify the sources of your income beyond residential housing. You could invest in a big, commercial property player like British Land, giving you exposure to offices and shops. This stock currently offers a prospective dividend yield of 5.6%. In addition, there are numerous companies specialising in niche sub-sectors of the property rental market. For example, Primary Health Properties concentrates exclusively on modern primary health facilities in the UK and Ireland. This stock currently offers a prospective dividend yield of 5%.

Furthermore, there’s no need to stick to property companies. Indeed, I would highly recommend diversifying across a range of industries and sectors. Right now, there are plenty of yields in excess of 5% available. VodafoneShell, HSBC, GlaxosmithKline, British American Tobacco, and United Utilities to name but a few.

Of course, dividends are not guaranteed. Sometimes a company may suspend or reduce its dividend for one reason or another. However, holding a diversified portfolio of stocks reduces the impact of any individual company cutting its payout. As such, diversification is the way I’d go.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended British Land Co, HSBC Holdings, and Primary Health Properties. 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.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

1 Warren Buffett stock I’m buying now

Coca-Cola is the fourth-largest holding in Warren Buffett’s Berkshire Hathaway. I’ll explain why I’m following Buffett and buying more.

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

I bought 4,403 Lloyds shares in June and 4,856 in September. Here’s what they’re worth now

Harvey Jones thought he was bagging a FTSE 100 bargain when he bought Lloyds shares on two occasions last year.…

Read more »

Young woman holding up three fingers
Investing Articles

I’m itching to buy these 3 hidden FTSE gems in a Stocks and Shares ISA

Harvey Jones is keen to add these three FTSE 100 companies to his Stocks and Shares ISA before April. Only…

Read more »

Close up of a group of friends enjoying a movie in the cinema
Investing Articles

How I’d try and turn just £1 a day into a fabulous £54,485 passive income for life

By investing small, regular sums in FTSE 100 shares I can potentially generate a huge passive income stream. It won't…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d aim for a million buying under a dozen shares

Christopher Ruane explains why less could be more when it comes to building a share portfolio if he wants to…

Read more »

Investing Articles

Rolls-Royce shares are up over 1,000% since 2020! Am I too late to buy?

Rolls-Royce shares now cost over tenfold what they did in the firm's 2020 rights issue. Our writer thinks they may…

Read more »

Investing Articles

1 top UK growth stock for my tech portfolio in 2024

Up 30% in just one year, this growth stock looks positioned to continue on the path of substantial gains, according…

Read more »

Buffett at the BRK AGM
Investing Articles

I’d follow Warren Buffett to target effortless passive income

Warren Buffett knows a thing or two about building passive income streams. By learning from the Sage of Omaha, so…

Read more »