To hell with buy-to-let! I believe this property stock and its big dividends is a better buy

Royston Wild discusses a property stock that he thinks is a better bet than investing in buy-to-let.

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In a recent article I looked at Grafton Group Units and explained why I think it’s a better investment than participation in the buy-to-let market.

Responding to smaller returns and higher regulations than in prior years, we here at The Motley Fool believe that investing in the stock market is a much better way to make your money work for you, and is likely to remain so as the UK’s homes shortage causes government to make life more and more difficult for landlords.

Aside from Grafton, I feel that another better way to play the property market instead of buy-to-let is through buying into brickmaking giant Forterra (LSE: FORT).

Residential build rates in the UK have failed to keep pace with demand growth over the past decade and this is continuing to turbocharge activity amongst the country’s homebuilders. Indeed, such is the scale of the supply shortage that many of the major construction players are ramping up production, and this bodes well for Forterra and its range of building products.

Stunning numbers

The strength of the new-build market was highlighted perfectly by brilliant full-year results from the Northamptonshire firm this month.

Revenues stepped 11% higher to £367.5m in 2018, which Forterra said was “partly due to a modest increase in volumes which reflected the sustained strength of the new build residential market following the strong growth seen in 2017.” But this is not the whole story. So tight is domestic brickmaking capacity that the small cap was successfully able to pass on cost increases across all its ranges to its customers, and this helped pre-tax profits sail more than 9% higher year-on-year to £64.8m.

And Forterra is confident that the trading environment should remain supportive for some time yet. It’s why last year it approved the construction of a £95m extruded brick factory in Desford, Leicestershire with annual production of 180m bricks, a move that will boost group production by 16% once it gets up and running in 2022.

Big dividends

Now I mentioned the prospect of huge dividends at this property stock in the headline so let’s get onto that.

Forterra has proved to be a winner for those seeking hot dividend growth in recent years, the business having hiked shareholder payouts by 80% over the past three fiscal periods in reflection of its explosive, double-digit percentage earnings rises.

City analysts are expecting profits progression in the next couple of years to slow markedly in the next couple of years — to 3% and 6% in 2019 and 2020, to be exact — and this creates predictions that dividend increases will decelerate as well. An 11p per share reward is predicted for this year, up from 10.5p in 2018, and an 11.6p payout estimated for 2020.

The good news is that these forward figures still yield a mighty 3.9% and 4.1% respectively, and they also look pretty well protected (covered 2.5 times by forecast earnings, in fact). Besides this, I reckon there’s a good chance that these dividend estimates will be booted higher as 2019 progresses and the strength of its end markets drives profits skywards. If you’re searching for great income shares, I believe Forterra is one that pays big right now and should keep doing so long into the next decade at least.

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.

Royston Wild 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.

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