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Why I’d ditch buy-to-let and invest in FTSE 100 dividend stock BAE instead

While buy-to-let properties have provided relatively impressive income returns in the past, FTSE 100 shares such as BAE (LSE: BA) may offer higher yields in future. Changes to the taxation of buy-to-let properties, alongside an uncertain outlook for the UK economy, may mean the company’s growing dividends hold greater appeal.

Of course, it’s not the only stock with dividend growth potential. Reporting on Wednesday was a FTSE 250 share with what appears to be a bright income future.

Improving prospects

The company in question is property investment business CLS (LSE: CLI). It announced on Wednesday it has exchanged contracts to acquire a freehold property in London for £53.85m. The property comprises of multi-let office space over seven floors, and is fully let to four tenants with a weighted average unexpired lease term of two years to breaks.

The property is being acquired at a net initial yield of 4.5%, and has a substantial reversionary rental upside to deliver an estimated yield approaching 8% through active management. The company expects to undertake a major refurbishment to deliver high-quality space in an improving area with limited supply.

With CLS having a dividend yield of 2.8%, its income appeal may not be obvious at first glance. However, with dividends per share expected to rise by over 7% per annum during the next two years, the stock could become an increasingly appealing income option. With what seems to be a sound strategy, and the potential for capital growth across the UK commercial property sector, its investing appeal could increase over the coming years.

Total return potential

As mentioned, BAE’s dividend investing potential could be more attractive than buy-to-let. The defence company faces the prospect of rising spending across NATO members, including the US. This could catalyse the wider industry after a period of cutbacks and austerity which have created financial challenges for a number of industry incumbents.

As such, BAE is expected to post a rise in earnings of 6% in the current year, followed by further growth of 8% next year. With the stock having a price-to-earnings growth (PEG) ratio of 1.4, it seems to offer a wide margin of safety. Its balance sheet suggests that it has the capacity to continue to invest heavily in new product development, while geopolitical risks in a variety of regions could mean that the defence industry experiences improving prospects over the medium term.

Certainly, there may be risks facing the world economy which could affect stocks which operate globally. However, with BAE having exposure to a variety of regions, it may offer greater diversification than some of its FTSE 100 peers.

With buy-to-let appearing to lose its appeal after those tax changes and the UK economy having an uncertain outlook, the stock could be a relatively attractive income investing opportunity for the long run.

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Peter Stephens owns shares of BAE Systems. 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.