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Why I’d dump buy-to-let and invest in FTSE 100 dividend share Shell instead

While the buy-to-let sector has provided high and rising income returns over recent years, it now seems to lack investment potential. A mix of increasing taxes on second properties, as well as the potential for higher interest rates, could mean that the returns available to property investors are less appealing than they have been previously.

In contrast, weakness in the FTSE 100 in recent months means that stocks such as Shell (LSE: RDSB) may now offer income investing potential. It has a relatively high yield, while its updated strategy could create a stronger business over the long run. Alongside another FTSE 100 dividend share which released results on Tuesday, it could be worth buying, in my opinion.

Improving outlook

The stock in question is tourism group TUI (LSE: TUI). Its first-quarter results showed that its performance during the period was in line with expectations. It has benefitted from a product-focused strategy, as well as investment in unique hotel and cruise brands.

However, the company suffered from expected weak performance in its Markets & Airlines business. The seasonal loss increased significantly in this segment due to the knock-on impact of the Summer 2018 heatwave, over-capacity in Spain arising from a shift in demand to the Eastern Mediterranean, as well as strong comparatives from the same period of the previous year.

Despite this, TUI is forecast to post a rise in net profit of 14% this year. With its dividend being covered 1.7 times by profit, its 7%+ dividend yield appears to be relatively appealing. While its near-term prospects may be uncertain due to challenging operating conditions, the stock could offer high returns in the long run.

Income potential

With a dividend yield of 5.9%, Shell continues to offer a relatively high income return. Unlike a number of oil and gas companies, though, it has a substantial amount of headroom when making its shareholder payouts. Dividends in the current year, for example, are expected to be covered 1.7 times by profit. This suggests that even if the oil and gas industry experiences a difficult period that causes profitability across the sector to decline, the company may still be able to afford its dividend payments.

In reality, the oil price is likely to experience continued volatility. It has a track record of reacting sharply to changes in the geopolitical outlook for OPEC members, and this is likely to mean that profitability across the industry ebbs and flows depending on the price of oil. As such, income returns from oil and gas companies are, by their very nature, more susceptible to changing operating conditions than elsewhere in the FTSE 100.

However, with Shell seeking to improve its balance sheet and increase the efficiency of its asset base, it could offer long-term income potential. With a price-to-earnings (P/E) ratio of around 10 and a high yield, its total return potential could be higher than many of its FTSE 100 peers, as well as buy-to-let, over the long run.

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Peter Stephens owns shares of Royal Dutch Shell B. 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.