Whenever I read about buy-to-let investing, I keep seeing estimates of likely yields that seem a bit optimistic to me.
I acquired a buy-to-let property about 30 years ago, and the income it’s provided me has been very variable. I’ve had good tenants, but I’ve also had bad ones (including one who did a runner and took everything, including the lightbulbs), and I’ve had a few long voids too.
I reckon that, after all costs but before tax, I’ve probably averaged a yield of around 4% per year. Starting today, I think I could beat that hands down by investing in FTSE 100 shares in a Stocks and Shares ISA instead, with the added benefit of not having to pay any tax on the profits. Oh, and the possibly even bigger benefit of not having to do any work.
At the moment, the FTSE 100 is offering a forecast overall dividend yield of 4.8%, with a number of top companies paying even more. BP is on a yield of 6.2%, for example, Legal & General on 6.3%, and BT on a massive 8% (though that’s forecast to drop to 6.7% by 2021).
There are bigger yields than that too, with housebuilder Taylor Wimpey set to pay out 10.6% (including a special dividend). A selection of those would do far better than my buy-to-let, even without any share price appreciation, and I could manage it all by sitting down and having to do nothing at all.
Over the longer term, the UK stock market has been providing total returns (including dividends and share price gains) of around 4.9% above inflation, according to Barclays (whose own dividend should yield 5.2% this year). Right now, that suggests a return of around 6.9%, and the difference that could make over 4%, over the long term, is quite stunning when you work it out.
One advantage of dividends from shares is that it’s easy to reinvest them in new shares and continue with the compounding, but it’s rather harder to reinvest rental income in more properties. I suppose you could save it up until you have enough for a mortgage deposit, then buy another and use the proceeds to pay it off.
Assuming you could reinvest rental income, a return of 4% per year over 30 years would end up more than trebling your original investment — it would, in fact, turn every £1,000 into £3,240.
But the same invested for 30 years in a Stocks and Shares ISA at 6.9% would build you a nest egg of £7,400 for every £1,000 of your initial cash. That’s more than twice as much cash, without paying a penny in tax on any of it.
Easy to do
How do you go about it? A web search will soon find you a range of low-cost ISA providers to choose from, and once you’ve opened an account, you transfer in some cash to invest. Then just choose what shares you want to buy, and make purchases whenever you’ve got enough to justify the purchase commission — most people see around £500 to £1,000 as a sensible minimum.
Then just sit back for the next 30 years and watch it grow. It’s got to be easier than finding tenants, banging on doors for rent, fixing everything that breaks, and all that.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.