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Forget buy-to-let. I’d buy the 10% dividend yield offered by the Centrica share price

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While the buy-to-let sector has been a reliable source of income for many investors over recent decades, a number of FTSE 100 shares may now offer superior income returns. One example is Centrica (LSE: CNA). Its 10% dividend yield is considerably higher than the yields available through taking on a buy-to-let, while it could offer good value for money at the present time.

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Improving prospects

The company in question is investor in UK industrial property Hansteen (LSE: HSTN). Its full-year results showed that it is making good progress in delivering on its strategy, with the size of its portfolio continuing to fall as it believes now is the right time to crystallise value created before the cycle turns.

Its like-for-like property valuation increase was 6.5% for the year, with 874 new leases or renewals at 10.4% ahead of their estimated rental value. It generated a significant profit on disposals during the year, with capital being returned to shareholders.

With Hansteen having a dividend yield of around 6%, it appears to offer an impressive income outlook. It believes there are still opportunities for sales in the near term, but over the long run its management platform could allow it to capitalise on the long-term growth potential offered across the UK commercial property sector. Therefore, now could be a good time to buy it while it trades on a price-to-book (P/B) ratio of around 0.9.

Turnaround potential

While Centrica has continued to disappoint over recent months, its current valuation suggests that it may offer a wide margin of safety. As mentioned, it has a dividend yield of around 10%, which makes it one of the highest-yielding shares in the wider utility sector. This suggests that investors may have accounted for the ongoing challenges faced by the business. They include political and regulatory risk, while the restructuring taking place across the business may also be unsettling investor sentiment to some degree.

Although it could be argued that Centrica has offered turnaround potential for some time, and has thus far failed to deliver, its recent update suggested that progress is being made in cost reductions. They are helping to underpin net debt levels, while new customer-facing capabilities in its consumer and business divisions could help to catalyse growth in the medium term. Divestments may also help to refocus the business on its best-performing areas over the coming years.

Since the stock has a dividend coverage ratio of 1.1, dividend growth may be subdued in the next couple of years. But with the company appearing to have turnaround potential and its yield being high at the present time, it could offer high total returns in the long run.

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Peter Stephens owns shares of Centrica and Hansteen Holdings. The Motley Fool UK has recommended Hansteen Holdings. 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.

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