Forget buy-to-let. I’d put my money into this FTSE 100 dividend stock

Roland Head highlights one of his top FTSE 100 (INDEXFTSE:UKX) picks for housing investors.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

One of the few certainties in life is that we all need housing. So investing in buy-to-let property might seem like a sure-fire winner.

The problem is that with the help of ultra-low interest rates, a huge amount of money has flowed into housing since the financial crisis. This has pushed up house prices, adding to the rising costs faced by landlords.

In my view, it makes more sense to gain exposure to the housing market through dividend stocks held in a tax-free Stocks and Shares ISA. Today I’m going to take a look at two companies that are on my radar at the moment.

#1 – profit from plumbing

FTSE 100 firm Ferguson (LSE: FERG) was previously known as Wolseley. The plumbing, heating and building material supplier’s name change was part of a shift towards the US market, which now generates more than 90% of profits.

Ferguson shares have fallen by about 25% over the last six months, as investors have started to worry about the risk of a slowdown in the US housing market. But these fears are starting to look overdone to me.

The group’s latest accounts show that sales rose by 8.2% to $10,847m during the six months to 31 January, while underlying operating profit rose by 7.7% to $744m.

Even if housebuilding activity does slow, I’ve seen nothing to suggest that we’re heading for a repeat of the 2008/09 crash. What seems more likely is a modest slowdown. If that happens, I don’t think Ferguson shareholders need to worry too much.

The group’s debt levels look comfortable to me and the shares seem increasingly affordable, trading on 12 times 2019 forecast earnings, with a 3.3% dividend yield. For long-term investors, I think this could be a good time to start buying.

#2 – a top UK housebuilder

When writing about housebuilders, it’s easy to focus on eye-catching figures like dividend yield and cash balances. But what about the quality of the houses built by each company?

Some recent news has made me think more about this. Last week, FTSE 100 builder Persimmon said that it would allow buyers’ solicitors to hold back 1.5% of the purchase price of each new home until any faults had been rectified.

Why is this necessary? I can only guess that lots of Persimmon homes may be poorly finished. Indeed, looking at the latest Home Builders Federation ratings, I see that the firm only managed a three-star rating in the latest customer survey.

Persimmon currently boasts a 29% operating profit margin, one of the highest in the sector. But its customers appear to have mixed feelings about the quality of their homes.

In contrast, FTSE 250 firm Bellway (LSE: BWY) recently received a five-star HBF rating for the third consecutive year. Bellway’s operating margin is lower, at 22%, but its customers appear to be very happy with their new homes.

How should this affect us as investors? I feel that over the longer term, Bellway’s focus on build quality and customer satisfaction might be good news for anyone committing their investment cash to the firm.

Although the group’s 2019 forecast dividend yield of 5% is lower than some rivals, broker forecasts suggest it should be covered nearly three times by earnings this year. That means that even if earnings slow after Brexit, Bellway’s dividend should remain affordable. I’d rate the shares as a buy.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

Could Raspberry Pi shares hit £5 by 2030?

After a strong start out of the blocks this month, our writer asks whether Raspberry Pi shares could move further…

Read more »

Close-up of British bank notes
Investing Articles

Five 5%+ yielders I’d buy for an ISA today!

Our writer identifies a handful of FTSE 100 and FTSE 250 firms each yielding at least 5% he'd happily buy…

Read more »

Front view photo of a woman using digital tablet in London
Investing Articles

5 stocks with 5%+ yields I’d love to buy and hold in a Stocks and Shares ISA

Harvey Jones is keen to add these five FTSE 100 high-yielders to his Stocks and Shares ISA, ideally before they…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d target £880 of passive income annually, spending £10K now on this FTSE 100 share

Our writer explains how he would add to his diversified portfolio happily by investing in this FTSE 100 passive income…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

3 reasons I think the Scottish Mortgage share price could keep rising

Christopher Ruane explains a trio of reasons he thinks the once-mighty Scottish Mortgage share price could be set to increase…

Read more »

Syringe and vial on blue background
Investing Articles

Is this forgotten FTSE share about to make investors rich all over again?

Not long ago, this FTSE share was all the rage before demand dropped off and things went south. Is it…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d use these 5 Warren Buffett approaches to build wealth

Christopher Ruane outlines a handful of investing lessons from billionaire Warren Buffett that he thinks can help a small investor…

Read more »

US Stock

Nvidia stock: 3 things investors need to know as it surges towards $150

Nvidia is a stock that's had an extraordinary run in 2024. Edward Sheldon highlights some important things investors should know.

Read more »