In recent months I’ve been loading up on cheap shares, to generate capital growth and income for my retirement.
During that time, the FTSE 100 has risen strongly, and purchases I made last October are already worth a lot more today. My best decision was buying aircraft engine maker Rolls-Royce on 1 November.
Property or shares: which to buy?
I thought it was cheap at the time but I didn’t expect the share price rally to be quite so swift. It’s up 70.91% since clicked the buy button.
Even though the FTSE 100 recently hit an all-time high of 8,000, there are still bargains to be had on the index. That’s the beauty of buying individual stocks rather than purchasing a tracker fund. They don’t all move at the same speed. Last time I looked, Anglo American, Barclays, Kingfisher and Unilever still looked cheap to me.
In contrast to the FTSE 100, UK property prices have been falling. I’ve considered investing in a buy-to-let property before, while never quite knuckling down to it. Is now finally the time?
I was struck by this paradox. The FTSE 100 has soared but still looks cheap, while house prices have fallen but still look pricey to me. So much for valuation, what about the yield? A buy-to-let is on the market in the same block as mine, asking price £375,000. The tenants currently pay £1,350 a month rent, which works out of £16,200 a year. That’s a yield of 4.3%.
That’s slightly higher than the FTSE 100 yield, which is currently around 4%, but in practice it seems a lot less attractive. Here’s why.
Investing in buy-to-let can be lucrative and works for many people, but it also has a lot of upfront costs. The biggest is stamp duty, especially since landlords pay a 3% surcharge. That would cost me a hefty £17,500, a tax rate of 4.67%. By contrast, stamp duty on share purchases is just 0.5%
Too much bother?
Since I would need to borrow to purchase a buy-to-let property, I would also have to stump up mortgage arrangement fees. Then there’s the cost and bother of doing up the flat, finding tenants, checking them out, carrying out maintenance works, and so on.
This is an uncertain time for buy-to-let, as the government considers new rules to protect good tenants against rogue landlords. I’m worried this will make it harder for good landlords to evict rogue tenants.
When I buy shares, I have no such conflicts to worry about. They just sit in my online platform, going up and down, and paying me dividends regularly. Workload minimal, stress factor low. Of course, the stock market may crash, but I’ve seen so many crashes in my lifetime, they tend to wash over me.
Stock dividends could be cut, so my income stream isn’t rock solid. I get round this by investing in a balanced portfolio of shares for the long term, by which I mean decades, giving my picks plenty of time to find their feet again.
Best of all, my portfolio will never ring me in the middle of the night to complain about a dripping tap. That’s why I’m buying cheap shares today.
