Buying a property and renting it out has been a popular source of income for some investors. But increasing difficulty and inconvenience around administration, running costs and tax relief have made potential investors stop and think again.
Ultimately, you need to look at the yield offered and compare it to what you could get from other investments, for example a dividend-paying stock. In a review of a TotallyMoney survey by my Foolish colleague Royston Wild (read the full article here), the buy-to-let yields ranged from 10% at the top end in Liverpool down to central London with just a 2.28% yield.
So how does this compare to a dividend yield stock? Well that depends. Within the FTSE 100 index, you could buy a stock that has a dividend yield of 10%, as well as others with a 2% yield and many figures in between. The key is to find firms with a solid business and generous-but-sensible yield so you can simply buy a stock and wait for the dividends to be paid.
While many people think share investing is all about ‘buy low and sell high’, the dividend yield is actually one of the main attractions for me when I compare shares to a buy-to-let property. And the icing on the cake comes if you can find a business that you believe could gain in value as well as offering an attractive yield!
To that end, have a look at Legal & General (LSE: LGEN).
Under the umbrella
Known by the distinctive multi-coloured umbrella logo, L&G offers a broad range of financial services, hence the logo. The main business operations stem from investment management, but it also has a large presence in the insurance sector.
Currently L&G has a dividend yield of 5.6%, which puts it in the higher quartile of the FTSE 100 index. When comparing this to the yields from property, it sits in the halfway house, but without the effort that being a landlord involves. Dividends from L&G have been consistently paid over the past few years, so the risk of them being cut or deferred in the near future is unlikely.
So far so good. But what I like about the firm is that added to the healthy dividend are the growth prospects of the company. Over the past year, the share price has rallied from 250p to around 300p.
Now, while you can get buy-to-let properties that have capital appreciation too, finding one that makes 20% in a year is a difficult task these days.
But is L&G now too expensive to buy? The numbers don’t seem to indicate that. The price-to-earnings (P/E) ratio sits just below 10, with the FTSE 100 average at 18.5. This indicates to me that the share still has the ability to climb further. While this will likely decrease the dividend yield, it offers a good opportunity for investors to buy in now and lock in the current dividend yield.
So, while buy-to-let properties can offer you a yield and some potential capital appreciation, high-dividend-yield stocks such as L&G provide both, but without the hassle of managing a property. Given the strong growth seen in the share price as well, the potential for capital appreciation is greater than on a property, in my opinion.
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Jonathan Smith and The Motley Fool UK have 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.