Over the past few decades, buy-to-let investing has generated a fantastic amount of wealth for investors.
However, recent changes to the way buy-to-let properties are taxed, coupled with new regulations to make landlords more accountable for their properties, mean that this asset class is much less attractive than it once was.
With this being the case, today I’m looking at two FTSE 100 dividend champions that I think might be a better investment than buy-to-let over the long term.
The first company I think has much better prospects is Diageo (LSE: DGE). And here are several reasons why.
First of all, the company owns a portfolio of some of the best selling and most recognisable alcoholic beverage brands in the world, including Guinness. These brands have loyal customer followings and are virtually irreplaceable.
On top of this portfolio of valuable brands, the company has a presence in virtually every country around the world. So, no matter what happens to the UK after Brexit, Diageo’s growth should continue.
Thirdly, Diageo is a cash machine. Last year, the firm generated around £2.5bn of free cash flow before the payment of dividends, giving a yield of approximately 3.5%. The dividend only cost the group £1.6bn, so it looks to me as if the company has plenty of headroom to increase its dividend over the next few years.
If management decides to devote all of its free cash flow to dividends, Diageo’s yield could hit 3.5% in the near term, up from 2.4% today.
Considering all of the above, Diageo’s globally diversified income stream from a portfolio of multi-billion dollar brands is a much better investment than buy-to-let, in my opinion.
Long term income
My other FTSE 100 income pick I think is a better buy is savings and investment group Legal & General (LSE: LGEN).
What I really like about Legal & General is the fact that it is designed and built for the long term. What I mean by this is that, as one of the largest retirement savings companies in the UK, customers have to trust that the business will be around when they retire in several decades. Therefore, management has to act conservatively and not take excessive risks. I think this provides an excellent foundation for dividend growth.
The stock currently supports one of the highest dividend yields in the FTSE 100 of 6.1% and, on top of this, it’s trading at a bargain basement valuation of just 8.8 times forward earnings. Usually, such a low valuation is a signal that the market believes there’s something wrong with the business, but I can’t find anything amiss here.
So I believe investors should make the most of this rare opportunity and snap up shares in FTSE 100 dividend giant Legal & General today.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Diageo. 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.