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Forget buy-to-let to fund retirement. I think these shares will provide far better returns

With the government putting more and more costs onto landlords, now is not the time to invest in buy-to-let to fund a retirement I don’t think. Indeed, a recent survey by insurer LV= found 41% of the UK’s 1.5 million private landlords are getting fed up with the government’s hostile environment. So instead of tying up huge amounts of cash in property, what I’d be tempted to do is find solid, high-growth and high-yielding companies and park my cash in a tax-efficient ISA or SIPP. Here are two shares that would be top of my list for investing in. 

Brick by brick

The first of my suggestions is, ironically, a property stock — FTSE 100 housebuilder Barratt Developments (LSE: BDEV). The whole housebuilding industry is out of favour with investors right now, reflected in low P/E ratios and high dividend yields. Brexit, the end of Help to Buy in 2023 and wider concerns about the economy are all playing a part.

This does though create an opportunity for investors with a long-term mindset – as those investing with retirement in mind should have. Barratt shares now have a P/E of nine and a dividend yield of 4.3%. That’s a potentially profitable combination of an undervalued share price and a generous income.

Back in July, the housebuilder revealed that it expected its full-year results, due in September, to show pre-tax profit ahead of expectations at around £910m. This will be up from £835.5m in 2018. Whereas rival Persimmon seems to be struggling to keep customers happy, Barratt has been awarded the Home Builders Federation maximum 5-star customer satisfaction rating for the 10th year in a row. It’s unlikely therefore to come under as much scrutiny as its rival and suffer the same reputational damage, which should make it easier to form joint ventures and sell houses to customers.

Like my Foolish colleague Rupert Hargreaves, I fully expect Barratt to do well in the coming years. I think it’s better to invest in shares of the housebuilders rather that actual buy-to-let properties.

Making a killing

I’ll admit one thing right from the outset: my second share suggestion is a little riskier. The price of pest controller Rentokil Initial (LSE: RTO) has been flying this year, which in turn means its P/E has shot up and pushed the dividend yield down. The upside is the share price has good momentum and there may well be more growth to come.

The shares are up 37% in the year to date, despite the recent market fall, and the price has gone up in the last month. I’d have to attribute this to the July announcement that in the first half of this year, organic revenue grew 4.2% to £49.2m. This was the highest first-half growth in more than a decade. Its ongoing operating profits climbed 11.6% to £152.1m. There was also the expectation that there will be further progress in the second half.

So yes, Rentokil’s shares right now are expensive with a P/E of around 35, but over the long term, the company could perform well, I feel, because it combines organic and acquisitive growth and I think any dip in the share price should be seen as a buying opportunity.

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Andy Ross owns shares in Persimmon. 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.