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Forget buy-to-let! I’d buy these property dividend stocks instead

The buy-to-let business isn’t getting any easier, especially if you only have only one or two properties. Interest rates can only really rise from current levels, while new regulations and tax changes mean costs are rising for many landlords.

Even if you’re still making a profit after all of that, you then have to face the risk of void periods, unexpected repair costs, and problem tenants.

This is what I do

I prefer to invest in listed property companies which operate on a much bigger scale. This normally means that the risks I’ve highlighted above are more manageable and have less impact on annual profits.

One example of this is Grainger (LSE: GRI), a FTSE 250 firm with a portfolio of almost 10,000 rental properties across the UK.

Grainger recently raised £347m from shareholders to help fund the purchase of the GRIP real estate investment trust. This REIT has a £696m PRS portfolio containing 1,700 housing units. The company expects GRIP to deliver an extra £32.5m of gross rents each year. This represents a 55% increase on Grainger’s 2017/18 gross rental income of £59.2m.

Growth focus

Grainger’s chief executive Helen Gordon has a strong focus on growth. Her aim is to build the company into the UK’s largest private rental provider. Such plans always carry a certain amount of risk, but the firm’s progress seems good to me, so far.

Debt levels have remained stable and the group’s focus on mid-market housing means that occupancy levels are high, at 97%. The firm has also recently been short-listed to build 3,000 new homes in London, on sites close to underground stations.

Grainger appears to have strong momentum. Its focus on rental should mean that cash flow stays strong, even if house prices fall. The forecast dividend yield for 2018/19 is modest, at 2.6%, but the payout is expected to grow strongly.

I can see a long-term opportunity here, although personally I prefer businesses with a stronger focus on income.

A 6% yield I’d buy

One example of the kind of property stock that I’d like to own is U and I Group (LSE: UAI). This developer specialises in urban regeneration projects, mainly in London, Manchester and Dublin.

The group’s developments tend to be mixed use, often combining office space, retail and residential property. Some are developed for long-term rental, while some are sold for a short-term profit.

The firm’s management tend to return surplus cash to shareholders each year, providing generous dividends. City analysts expect a payout of 13.4p per share this year, giving a forecast yield of 6.4%. However, my colleague Rupert Hargreaves believes the final payout could be greater.

Insider buying

The downside of this focus on dividends is that U&I’s net asset value has remained fairly flat in recent years, at about 280p per share. This could limit long-term share price gains. However, with the stock currently trading close to 200p, I think the valuation is low enough to leave room for a profit.

The firm’s board seem to share this view — since the end of August, deputy chief executive Richard Upton has bought £265,000 worth of U&I shares, taking his total holding to £6.7m. At current levels, I share Upton’s view that the stock is a buy.

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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.