Acquiring buy-to-let property has been an excellent way to build wealth over the past few decades. However, current trends suggest that owning UK shares may be a better way to grow a financial nest egg going forward.
Indeed, over the past few years, the government has introduced a range of tax and regulatory changes that have made it harder for buy-to-let investors to earn a good profit.
As well as these changes, rising property prices and stagnating rents have also squeezed investors’ profit margins. The average rental yield of UK property is now just 3.5%. Although some areas do offer a return of 5-7%, on average, many UK shares offer a better return.
In addition to their more attractive income credentials, UK shares also offer international diversification. More than two-thirds of the profits from FTSE 100 companies are generated outside the UK. This provides an additional layer of protection for investors, which buy-to-let property doesn’t offer.
UK shares vs buy-to-let
Consumer goods giant Unilever currently supports a dividend yield of around 3.5%, in line with the average rental yield of UK property.
The company also owns a diversified portfolio of billion-dollar consumer brands. It has an enormous presence in emerging markets and offers diversification across its product lines. This diversification has helped the organisation navigate the coronavirus crisis quite successfully compared to other UK shares.
Moreover, the company’s current share price of around £46 makes it significantly more accessible than buy-to-let property. The average UK property price is around £232,000.
Other UK shares that currently appear to offer a better return than buy-to-let property include tobacco giant British American Tobacco and asset manager Standard Life Aberdeen. Despite the pandemic, both companies are standing by their dividends to investors. The stocks currently support dividend yields of 8.5% and 6.7% respectively.
Some of the most defensive UK shares on the market are National Grid and GlaxoSmithKline. Both of these companies generate income from relatively defensive industries such as utilities and pharmaceuticals. The stocks offer dividend yields in the region of 5% and have produced impressive total returns for investors over the past decade through a combination of income and capital growth.
It would be virtually impossible for the average investor to replicate for the sort of defensive income streams these companies generate. Even large blue-chip corporations would struggle to replicate the utility infrastructure network National Grid operates. This suggests the firm has the potential to generate attractive profits for shareholders for many decades.
The bottom line
All of the UK shares profiled above could produce better returns than buy-to-let property in the long run. These companies are sector leaders and are managed by some of the most experienced managers in the business.
This means that, unlike buy-to-let property, which investors have to manage themselves or pay a hefty management fee, these stocks can be left alone. Shareholders can sit back and watch the dividends fall into their account.
