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Why I’d dump buy-to-let and buy into the RBS share price today

While buy-to-let properties are often purchased to generate a second income, FTSE 100 shares such as RBS (LSE: RBS) could offer stronger income potential. Changes to taxation on buy-to-let income means that on a net basis, shares could offer greater income returns due to the availability of products such as ISAs and SIPPs.

With RBS set to increase dividends over the medium term, now could be the right time to buy it. Alongside another dividend growth stock that released an update on Thursday, it could deliver an impressive income return in the long run.

Improving outlook

The company in question is home improvement and home building products supplier Marshalls (LSE: MSLH). Its full-year results showed that it has been able to perform well despite challenging trading conditions. Revenue increased by 14% to £491m, while pre-tax profit moved 21% higher to £62.9m. Its return on capital employed improved by 110 basis points to 21.9%, while strong cash generation has continued.

The company’s self-help programme appears to be making a real impact on its financial performance. It is focused on innovation, with increases in R&D expenditure set to lead to new products that could drive sales higher.

While Marshalls has a dividend yield of just 2.6%, its dividend growth potential seems to be high. In the last five years, dividends per share have risen at an annualised rate of 25%. With dividend payments due to be covered 1.8 times by profit, there could be scope for continued dividend growth over the medium term. As such, the stock could become an impressive income opportunity, with its share price performance having the potential to be positively catalysed by a rising dividend.

Growth potential

As mentioned, RBS could become an increasingly appealing income share. The company has experienced a challenging recent past, with it still not having returned to full financial health following the financial crisis. This shows just how dire its prospects were a decade ago, and it is likely to take a number of years for it to move away from the effects of the credit crunch.

However, the bank’s management appears to be confident in its ability to achieve improving performance. It has restarted dividends, with the stock expected to yield 4.8% in the current year. This figure has been boosted by a falling RBS share price, the bank having been relatively unpopular among investors in the last year as the prospects for the UK economy have become increasingly uncertain.

Looking ahead, Brexit could disrupt the company’s near-term prospects. However, with factors such as a rising interest rate and the expected reduction in PPI claims likely to have a positive impact on its performance, dividend growth could be impressive. The RBS dividend for 2019 is due to be covered 2.2 times by profit, which suggests that it is able to afford a much higher shareholder payout. This could lead to a strong income return in the long run which makes the stock more appealing than buy-to-let properties.

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Peter Stephens owns shares of Royal Bank of Scotland Group. 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.