The attraction of buy-to-let investing is strong. We all understand people’s need for a home, and we understand the value of physical property. And the history of the UK housing market tells us that house prices usually go up over time.
However, all the buy-to-let investors I know have had to work hard for their income over many years. They’ve suffered problem tenants, unexpected repair bills and rising costs. Not all of these property investors have managed to turn a profit.
Is the time right?
One lesson that stands out is the importance of timing. The people I know who’ve made money from buy-to-let bought their properties when they were relatively cheap, with small mortgages.
The picture today is quite different. House prices are close to record highs in many areas and other costs are rising. I don’t think now is the right time to get started in buy-to-let.
Why I’d buy stocks
It probably won’t surprise you to know that I’d much rather put my cash into the stock market. I’m particularly attracted to the FTSE 100 at the moment, which contains a number of dividend stocks which I think offer excellent value.
What I’m looking for is shares I could buy today and hold for many years to come. Instead of a rental income from buy-to-let, I’ll receive a hassle-free dividend income.
One company I rate highly is defence group BAE Systems (LSE: BA). Shareholders who bought the stock five years ago have already received 26% of their original investment back as dividends. That’s an average cash income of about 5% per year, with zero effort required and no costs. I think that compares pretty well to typical net yields from buy-to-let property.
In addition to this, the shares have risen by 13%. So shareholders have enjoyed a total return of 39% in five years.
There’s more to come
BAE’s 2018 results received a shaky reception on Thursday after the company warned of possible problems with a deal to sell aircraft to Saudi Arabia. Personally, I share my colleague Ed Sheldon’s view that this is just short-term noise.
I’m more interested in news that BAE’s order intake rose from £20bn to £28bn last year, lifting its order backlog from £38.7bn to £48.4bn. I’m also attracted by the firm’s stable profits and reliable cash generation.
With the stock trading on 11 times forecast earnings and offering a 4.8% yield, I think now could be a good time to buy.
An overlooked income powerhouse
Another FTSE 100 stock I rate highly for income is software group Micro Focus International (LSE: MCRO). This company specialises in supporting, developing and extending legacy enterprise computer systems, of the kind used by many big businesses.
Micro Focus hit problems last year with the integration of a major acquisition. But the firm’s management appear to have the situation under control and performance is steadily improving.
I like this business because it enjoys high profit margins and generates a lot of surplus cash. For example, last year’s 12-month dividend of 100.8 US cents per share was covered 1.8 times by free cash flow of $755m.
This leaves me confident that the stock’s 4.4% dividend yield is sustainable and should continue to rise. I continue to view Micro Focus as a dividend buy.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Micro Focus. 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.