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Forget buy-to-let! I’d rather buy this FTSE 250 property stock and its growing dividends

Regular readers will know that we here at The Motley Fool aren’t exactly fans of buy-to-let.

By the time you consider fading tax relief and increasing costs, as well as the possibility that dizzying home price growth may not be a thing of the past, I reckon that investing in stocks has become a much more attractive way to make your money work for you. It’s why I have chosen equity markets over the chance to become a landlord myself.

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I would consider a better, albeit indirect, way to play the property market is via buying into Grafton Group Units (LSE: GFTU). The business distributes building materials to trade customers, and because Britain needs to double-down on homebuilding in the coming decades, I’m tipping profits here to keep rising.

Even if you’re fearful over Brexit and how this could dent homes demand and thus build rates in the years ahead, I reckon that Grafton is a great share to buy. Why? Well the retailer is also a  major player in Ireland as well as the Low Countries, territories which are also suffering from chronic homes shortages and whose economic prospects aren’t overshadowed by political upheaval like that of the UK.

Profit are booming

Latest financials underlined just why I believe the FTSE 250 firm’s such a great investment right now. Revenues across the group rose 9% in 2018 to a shade under £3bn, Grafton citing the “benefit from exposure to the fast-growing Irish and Dutch markets and from strong underlying demand fundamentals in the UK market.”

Adjusted pre-tax profit rose 20% to £188.4m last year, but this wasn’t only down to its soaring top line. The Dublin firm’s efforts to supercharge margins are also paying off handsomely and as a consequence, operating profit margin at group level  boomed by 60 basis points to 6.6% in 2018, putting it further towards Grafton’s medium-term target of 7%.

Those improving margins have also improved the company’s reputation as a colossal cash machine. Cash flow generated from operations of £209.2m last year remained stable from 2017 levels, and its ability to chuck out the readies is enabling it to keep delivering some brilliant acquisitions as well. 2018 saw the business snap up London-based decorating specialist Leyland SDM for £82.4m, the majority of whose outlets can be found in the more affluent parts of the capital like Kensington and Notting Hill.

Payouts to continue rising!

It’s no surprise that Grafton’s bright outlook and exceptional cash generation prompted it to raise the full-year dividend for 2018 by an impressive 16%, to 18p per share, keeping its progressive dividend policy going nicely (annual payouts have risen 67% over the past five years).

And City analysts believe that, supported by a predicted 7% earnings rise in 2019, payouts will rise again to 18.3p per share. Yields bigger than Grafton’s forward figure of 2.4% can be found, sure, but few appear as rock-solid (the estimated dividend is covered 3.5 times by forward earnings) or in as good a shape to keep raising annual rewards at the same stratospheric rate. I consider Grafton to be an exceptional income stock to buy today, and particularly for those looking to play the property markets.

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Royston Wild has no position in any of the shares mentioned. 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.