Personally, I don’t see the point in buying a buy-to-let property when I can generate far superior income from a top FTSE 100 dividend stock. Especially since I can get capital growth on top when markets finally start rising again.
I can even get direct exposure to the fortunes of the UK property market, by investing in a house builder such as Taylor Wimpey (LSE: TW).
While bricks and mortar will always have its appeal, investing in dividend stocks seems to me like a far easier way to achieve the same goal.
I really like this dividend stock
Shares are so much easier to buy and sell than property. Transactions take seconds rather than months. The stamp duty charge is much lower at just 0.5%, whereas it now starts at 5% on prices above £250,000. Buy-to-let investors pay a 3% stamp duty surcharge as well.
I reckon most landlords would be delighted to get the same yield as Taylor Wimpey offers. It is currently forecast to pay an income of 9.6% a year.
While a high yield is often sign of a business in distress, this dividend is nicely covered 2.2 times by earnings. Although I accept that this reflects the fact that the Taylor Wimpey share price has fallen a lot faster than the property market.
It is down 36.96% over 12 months, and 52.91% over five years. By comparison, the average home has climbed 9.9% over the last year to £293,835, Halifax figures show, and is up 30.5% measured over five years.
This only confirms my view that property is expensive right now. It has to fall, as mortgage rates rise. At the same time, housebuilder stocks look attractively valued.
Today, I can buy Taylor Wimpey for just 4.9 times forecast earnings. While markets could fall further, today’s low entry price gives me some protection against further volatility. It should also offer me plenty of upside, when the stock market recovery comes.
I don’t think that will happen for a little while yet. Not until interest rates peak, which probably won’t be until inflation is crushed by the coming recession. But it will come.
Shares may rise while property is crashing
A key difference between the stock and property market is that the former is forward-looking, and reflects where the economy is likely to be in around nine months’ time. By contrast, house prices are only just starting to feel the heat, as this year’s troubles intensify.
Taylor Wimpey faces a host of challenges. The cost of materials and wages will rise. Demand will fall as mortgage rates increase. Its dividend is not guaranteed. Yet I reckon its shares are likely to start climbing the moment the recovery is sighted, when house prices may still have some way to fall.
The only thing that stops me from buying Taylor Wimpey today is that I bought rival FTSE 100 dividend income aristocrat Persimmon just a couple of weeks ago. That’s up 13.57% since then. Maybe the recovery is already underway.
