Investing in a buy-to-let property used to be a great way of generating extra income in retirement, but it’s not so tempting now.
Higher rate mortgage tax relief is being phased out, while investors must also pay a 3% stamp duty surcharge on purchases. As if that wasn’t enough, landlord ‘wear and tear’ allowances have been cut back as well.
Personally, I’d rather invest in FTSE 100 stocks, which also give you a winning combination of capital growth and income, but with a lot less bother. Also, if you buy inside your Stocks and Shares ISA allowance, you will not have to pay a penny of tax on your gains. Here are two to consider.
HSBC Holdings
One stock I would consider is global bank HSBC Holdings (LSE: HSBA). This is the third-largest company in the UK, after Royal Dutch Shell and Unilever, with a market cap of a massive £116bn. The group generates more than 90% of its earnings from China and Hong Kong, which exposes you to the greater growth potential of fast-growing emerging markets, but with the superior corporate governance you get from a London listing.
The bank isn’t without its risks, though, so make sure you understand those. For example, the HSBC share price has fallen around 12% over the last year, as the Chinese economy has been hit by US trade wars, while the political turmoil in Hong Kong hasn’t helped.
However, recent underperformance has made today’s entry price look tempting, as it now trades at just 10.4 times forward earnings, far cheaper than the average ratio for the index of around 17 times earning. Its price-to-book ratio is 0.8, comfortably below the 1.0 usually seen as representing fair value.
HSBC is now restructuring in a bid to increase its return on capital, and the cost-cutting operation should further drive shareholder value. This is a terrific income stock, with a forecast yield of 7%, far higher than you will earn in rent on most buy-to-let properties. Hong Kong remains a worry, so take a view on that risk before you buy.
Legal & General Group
I have regularly tipped FTSE 100-listed insurer and asset manager Legal & General Group (LSE: LGEN), and now appears to be justifying my faith in it. The L&G share price is up almost 25% this year, but still trades at a dirt-cheap valuation of just 8.8 times forward earnings.
The £16bn group offers a wide range of financial services, including investment management, lifetime mortgages, pensions, annuities, life assurance, and general insurance, and will benefit from the trend for people to make more provision for their future.
It is a major asset manager with more than £1trn of assets, and a UK leader in bulk annuities and life insurance. Over the last 10 years, it has delivered a total shareholder return of 404%, with dividends invested, outstripping the FTSE Life index at 182%.
Legal & General has delivered regular dividend growth in recent years and now offers a secure yield of 6.2%, healthily covered 1.9 times by earnings. Again, that’s more than you will get on many buy-to-let properties, and with a lot less tax and trouble.
