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Forget buy-to-let! I’d rather buy this cheap property stock and its big dividends for my ISA

The danger of investing in buy-to-let is a topic that we touch upon with great regularity here at The Motley Fool. And it’s not something that we’re prepared to apologise for.

A combination of rampant property price growth and soaring rents — both on account of Britain’s chronic homes shortage — once meant that getting involved in property rentals was a lucrative endeavour. But with homes values stagnating (or even dropping in some parts of the country), and both the operating costs and tax liabilities that landlords face marching steadily higher, the possible returns on offer more recently have dwindled to, well, some pretty small potatoes in investment terms.

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No wonder the number of British buy-to-let investors is shrinking. According to UK Finance, the number of mortgage approvals for buy-to-let home purchases dropped 3.5% in September to 5,500. And this accompanies the steady stream of existing landlords selling up and exiting the sector altogether.

A better way to play property

Why take the risk with this increasingly problematic investment sector when there are so many better ways to get access to the property market? I for one would much rather buy shares in McCarthy & Stone (LSE: MCS), and latest financials in early November showed why.

According to the business, which develops and manages retirement communities, revenues in the 14 months to October 2019 are expected to have risen 7% year-on-year to £720m. Underpinning this predicted growth is a 3% rise in the average selling prices of its property, to £308,000, as well as a rise in total completions to 2,301 from 2,134 a year earlier. Underlying operating profit is tipped at £64m-£71m too, up from £67.5m last time out.

McCarthy & Stone also announced a significant improvement in its balance sheet, great news for shareholders with a particular penchant for big dividends. Net cash at year end ballooned to £24m from £4m in fiscal 2018.

Big dividends at low cost

McCarthy & Stone isn’t immune to the pressures engulfing the broader housing market, of course, as existing homeowners opt to stay put in this time of great political and economic uncertainty. This is why City consensus suggests that earnings at the FTSE 250 firm will grow just 1% in fiscal 2020.

I’d encourage investors to look past the flattish profits outlook for the near term, however, as the consequences of Britain’s rapidly-ageing population leave plenty of earnings opportunity for the retirement living specialist. According to the Office for National Statistics, there are currently 12m citizens aged 65 and above, a number that it predicts to swell to almost 21m by 2050.

At current prices, McCarthy & Stone trades on a forward P/E ratio of 14.5 times, a bargain in my opinion given that exceptional growth picture in the coming decades. And on top of this, investors can tap into a mighty 4% yield too, one that surges past the UK mid cap average of 3.3%. So forget buy-to-let, I say, and buy this brilliant income share with a view to holding it for decades into the future.

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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.