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Why I’d buy these 2 high income stocks over a buy-to-let property

For years, I wanted to invest in a buy-to-let property, but never got round to it. Now I understand there was a sound reason for my inertia.

It was simply too much bother.

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Let it go

Building a 25% deposit, applying for a mortgage, searching for properties, paying for a survey and legal fees, and doing the place up always seemed such a faff. And then you had the effort of finding tenants, and making sure they paid the rent and didn’t trash your property.

I think it was the underlying fear of having a tenant from hell that ultimately deterred me. But as you can see, there are other challenges too.

It is so much easier to invest in stocks and shares. Especially since the Treasury’s combined tax attack, with that 3% stamp duty surcharge, reduced wear and tear allowances, and the gradual phasing out of higher rate tax relief. If you invest inside a Stocks and Shares ISA allowance, you don’t have to worry about any of that. All your gains are free of income tax and capital growth, for life.

Property investment

You can still get exposure to the domestic property market and a combination of income and capital growth, by investing in the shares of UK housebuilders such as FTSE 100-listed Barratt Developments (LSE: BDEV) and FTSE 250 stock Bovis Home Group (LSE: BVS).

You can buy and sell their shares in seconds, making them vastly easier to invest in than buy-to-let, although admittedly they are not without risk, as Brexit continues to cast a shadow over the housing market.

Brexit, bah!

Both builders are solid businesses and have seen their share prices rise by around 20% over the past six months. One reason for the recovery is that investors and house buyers appear to have decided they can’t spend the rest of their lives worrying about the next twists and turns in our EU exit, and have decided to carry on regardless.

The UK property market has been surprisingly resilient throughout all the wrangling, although there are signs London is finally feeling the impact with prices down 3.8% in the last year.

Bargain stocks

This uncertainty is reflected in the two companies’ valuations, as both are now available at a discount. Barratt currently trades at just 8.6 times forward earnings, while Bovis is only slightly more expensive at 9.1 times. This is well below the 15 times generally seen as fair value. The sector took the result of the EU referendum harder than most, but there has been no meltdown.

Barratt now offers a seriously generous income yield of 7.5%, covered 1.5 times by earnings. The company’s balance sheet boasts net cash of £387m and the payout looks solid for now. The Bovis yield is even more dizzying at a forecast 9.2%, although cover is thinner at 1.1. Net cash is around £127m. Both stocks look set to post modest but steady earnings growth over the next few years.

There are threats, naturally. House prices could fall, the Help to Buy scheme will be scaled back in 2021 so only first-time buyers will be eligible, and it will end altogether in 2023. I’d still buy these two stocks over a buy-to-let, though.

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Harvey Jones 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.