Making money from buy-to-let property isn’t getting any easier. In recent years, landlords have had to face high house prices and an increased burden of regulation and tax charges. Average rental returns fell to just 2.1% in the 2018/19 tax year, according to research.
In my view, buy-to-let only makes sense today if you can run a large portfolio of property as a full-time business. For part-time investors with more limited resources, I think property dividend stocks are a much better choice.
Valuations in many sectors are depressed at the moment. And dividend yields can be high — some good quality FTSE 100 REITs are offering yields of more than 6%, as I’ll explain shortly.
Is this 13.1% yield for real?
Let’s start with a real cracker. The NewRiver REIT (LSE: NRR) share price has fallen by more than 50% over the last two years. But this FTSE 250 property group’s dividend has continued to rise, leaving the stock offering a dividend yield of 13.1%.
Is this sustainable? Investors are divided on this point, hence the group’s low share price. The problem is that NewRiver owns a lot of retail property, along with a portfolio of pubs. Retail property is out of favour at the moment as consumers desert the high street and shift their spending online.
The company says its community-focused retail portfolio should be resilient. Retail occupancy has remained fairly strong, falling from 97% in March 2018 to 95.4% in July. Although the net asset value of NewRiver’s property portfolio fell by 6.4% to 261p per share last year, this was no worse than expected.
I suspect the dividend will be cut at some point but, at about 160p, the stock trades at a tempting 37% discount to book value. Overall, I think the shares probably offer some value at current levels. But I think there are safer income options elsewhere, including my next pick.
I reckon this 6% yield is safe
One stock I’ve been buying is FTSE 100 landlord British Land (LSE: BLND). This £4.7bn group owns a portfolio of high-quality London office space and mixed-use developments. It also owns a number of large shopping centres around the UK, such as Sheffield’s Meadowhall centre.
Although this retail exposure isn’t without risk, the company’s share price is already trading at a 43% discount to the group’s net asset value of 905p per share. As with NewRiver, occupancy remains high, at about 97%. Rents have also been fairly stable.
However, British Land’s dividend looks much more affordable to me. NewRiver’s payout was not covered by the group’s cash generation or by its earnings per share last year. By contrast, British Land’s 2018/19 dividend was covered comfortably by the group’s earnings and by its cash flow from operations. In my view, this significantly reduces the chances of a dividend cut in the near future.
Gearing is also much lower at British Land. The group’s loan-to-value (LTV) ratio was almost unchanged at 28.1% last year. By contrast, NewRiver’s LTV rose sharply, from 28% to 37%. This also suggests to me cash could become tight at the smaller firm.
British Land remains one of my top picks in the property sector and I’ve added to my holdings in recent weeks. Although nothing is certain at the moment, I think it’s a good option for investors seeking a reliable 6% dividend yield.
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Roland Head owns shares of British Land Co. The Motley Fool UK has recommended British Land Co. 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.