With house prices having surged higher over the last decade in many parts of the UK, the yields available on some buy-to-let investments may have declined.
This reduction may have been exacerbated by additional tax payments required by landlords under changes to mortgage interest relief, as well as an uncertain period for the UK economy limiting rental growth.
As such, now could be a good time to consider FTSE 100 shares as a means of generating an income. Here are two 5%+ yielders that could provide improving dividend growth, as well as tax efficiency when purchased through a Stocks and Shares ISA.
Advertising and PR specialist WPP (LSE: WPP) is in the midst of a major change to its strategy and business model. It is making a large number of asset disposals, as it seeks to focus on its most profitable areas that offer stronger long-term growth. In addition, it is aiming to reduce costs and pivot towards the technology segment to enhance its growth potential.
While this is causing a significant amount of disruption for the business, and may mean there is share price uncertainty in the short run, its long-term growth prospects appear to be improving.
Furthermore, weak investor sentiment means that WPP now has a dividend yield of 6%. Although its dividend payout may fail to rise in the near term, its cover of 1.6 times suggests that it is highly affordable.
The company’s long-term growth potential appears to be high. After an extended period of having an acquisition-led business model, its shift to a leaner and more focused strategy is likely to take a number of quarters to successfully implement. But with a price-to-earnings (P/E) ratio of 10, it seems to offer good value for money.
Another FTSE 100 share that could provide a generous income return is diversified mining business BHP (LSE: BHP). Its share price has come under pressure in recent months due in part to a weaker outlook for major economies such as China. This trend may continue in the short run, with there currently being no solution to the trade war between the US and China.
As a result of its share price fall, BHP now has a dividend yield of 6.2%. Its shareholder payouts are expected to be covered 1.5 times by net profit in the current year, which indicates that they may prove to be affordable even if market conditions do not improve in the coming months.
Since BHP has a relatively strong balance sheet and a wide range of assets, it could be better protected from a wider mining sector downturn than many of its peers. Therefore, while it may be a relatively risky income opportunity, its high yield and long-term growth potential could make it appealing within a diversified portfolio of shares.
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Peter Stephens owns shares of WPP. 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.