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I’d avoid buy-to-let and consider these FTSE 100 dividend stocks instead

Buy-to-let property can be an enticing venture for anyone with a bit of spare cash. Browsing online estate agents can throw up hundreds of properties that give the illusion of being a bargain buy. However, it doesn’t take much to realise the time, effort and cost involved in buy-to-let are vast.

If you get lucky, you might purchase a property in an up-and-coming area that increases in value. However, that’s rarely the case these days. And most properties also need repairs, updates or alterations before they can be let.

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From buy-to-let to buy-and-hold

An alternative to buy-to-let properties is investing your money in the stock market. If property interests you, then the housebuilding sector may appeal.

Housebuilder Persimmon (LSE:PSN) benefited from the December election result that brought a little more stability to an uncertain sector. Persimmon’s share price has increased by 29% since the election and its margins continue to grow.

The FTSE 100 company has a market cap of £10bn, its price-to-earnings ratio (P/E) is under 12 and earnings per share are £2.77. But most enticing of all is its generous 7.4% dividend yield.

It builds over 16,000 new homes a year in over 380 locations in the UK. But the company has some issues. Over the years there has been lots of negative publicity about poorly-built homes while management continues to be rewarded with very generous pay packets.

The financial fundamentals for this company make it look like a no-brainer Buy, but as that weak reputation shows, it’s not without risk. Add to that the fact that Brexit uncertainty is far from over and calls for the government to inspect the housebuilding sector for fire risk, among other hazards, pose a threat to its continued success. The dividend yield is tempting, but I’d buy with caution and keep a close eye on sector news.

Turnaround to profit

Another FTSE 100 company I’d consider is Melrose Industries (LSE:MRO), a specialist manufacturing investor.

Melrose buys struggling industrial businesses and turns them around to make a profit for investors. Its strategy has paid off. Its share price has skyrocketed 42% in the past year and over 355% in the past five years. Shareholders are happy and there could be more to come.

The company is considering a $3bn sale of its Nortek Air business along with a sale of its Brush power generation equipment unit, thought to be worth around $131m.

Melrose bought FTSE 100 contemporary and engineering giant GKN for £8bn in 2018. This appears to have been a good move, and the turnaround plan is going well. Investors are waiting patiently with anticipation of generous profits to come.

Melrose has a 2% dividend yield and a 48% debt ratio due to strong cash generation. Its P/E is around 16, which is close to the industrial sector average. I think it looks like a good company to add to a long-term buy-and-hold portfolio.

It’s difficult to earn a passive income from buy-to-let property investing, but the stock market can be much more rewarding and investors can be as passive or as active as they like. I think it wins hands down.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK owns shares of Melrose. 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.