Forget buy-to-let! Here are two 5% dividend stocks I’d buy instead

Roland Head looks at two mid-cap dividend stocks with exposure to the housing market.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Buy-to-let investing is often billed as the road to retirement riches for ‘ordinary’ Brits. But I’ve known plenty of buy-to-let landlords who’ve lost money, ended up in tax disputes, or suffered repeated damage to their property.

Personally, I prefer to gain exposure to the housing market by investing in listed companies with exposure to UK property. Today, I’m going to look at two such firms, both of which offer attractive 5% dividend yields

A guaranteed profit from buy to let?

One way to make money from buy-to-let property is to provide mortgages for landlords. Paragon Banking Group (LSE: PAG) is a specialist buy-to-let lender with more than 20 years’ experience. During the year ending 30 September, the value of new loans to landlords rose by 6.8% to £1,495.5m.

Should you invest £1,000 in Vodafone right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Vodafone made the list?

See the 6 stocks

This increase helped to lift the group’s adjusted pre-tax profit by 25.3% to £181.5m last year. Paragon’s return on tangible equity — a key measure of profitability for lenders — rose from 13.4% to 16.1%.

Demand from buy-to-let landlords is said to remain strong. The firm’s pipeline of new lending opportunities rose by 28.9% to £778.9m last year. One reason for this may be that tougher government rules on lending to landlords have prompted some smaller lenders to exit this market. This could make it easier for larger players like Paragon to increase their market share.

Why I’d buy

Paragon’s main focus is on what it calls “professional landlords.” This generally means borrowers with more than three mortgaged rental properties, or those renting houses of multiple occupation.

As a potential investor, this looks more attractive to me than pinning my hopes on a single rental property.

I’m also attracted by Paragon’s valuation. The shares currently trade at just 1.2x their tangible net asset value of 359p per share. Alongside this, broker forecasts indicate a dividend yield of 5.1% for 2018/19. Overall, these shares look good value to me. I’d rate Paragon as a buy.

Bricks, but no mortar

Many new-build houses are sold to rental landlords. Although you can invest directly in house-builders, one way to spread your exposure more widely is to buy shares in a brick maker.

One of my favourite stocks in this sector is Forterra (LSE: FORT). Shares in this firm have fallen by nearly 30% this year, but I think this sell-off may have gone too far.

The group’s latest trading update reported “good levels of activity in the new build residential sector.” Sales so far this year are said to be “marginally ahead” of last year. Although rising costs from energy, fuel and carbon credits put some pressure on profits, the company still generated enough cash to reduce net debt by 8% to £56.1m.

Unfortunately, problems with a kiln mean that this facility will have to be rebuilt before operations resume. This means that operating profit this year will be £2m-£3m lower than expected.

I don’t see this one-off problem as a huge concern. Broker forecasts indicate that earnings are expected to rise by 4%, to 25p per share this year. This earnings figure should cover the forecast 10.4p dividend 2.5 times, providing a good margin of safety for income seekers.

At the time of writing, Forterra shares were trading at 218p. This puts the stock on a forecast price/earnings ratio of 8.3 with a dividend yield of 4.9%. I believe this could be a good buy, despite the risks of a housing slowdown.

But there may be an even bigger investment opportunity that’s caught my eye:

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. 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.

More on Investing Articles

Dividend Shares

How a stock market crash could boost investors’ passive income by over 40%

Jon Smith explains how a continued fall in the stock market isn't always a bad thing, especially when it comes…

Read more »

Investing Articles

If an investor put £10k into Greggs shares one month ago, here’s what they’d have today

Greggs shares have had a tough year but Harvey Jones says they're notably cheaper as a result, while the dividend…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

The Phoenix share price jumps 7.5% on today’s results, but still yields a stunning 9.4%!

Harvey Jones put his faith in the Phoenix share price and this morning was rewarded with a 7.5% jump on…

Read more »

Investing Articles

What’s been going on with the Barclays share price?

The rising Barclays share price reflects confidence in management’s strategy to improve business performance and enhance shareholder returns.

Read more »

Investing Articles

Prediction: in 1 year, the IAG share price could reach as high as…

The IAG share price has almost doubled in the last 12 months, but can this momentum continue in 2025? Zaven…

Read more »

Investing Articles

Prediction: in 12 months, here’s where the Glencore share price could be…

The performance of Glencore’s share price has been lacklustre, to say the least. But could all that change over the…

Read more »

Investing Articles

See how much an investor needs in their ISA to earn a £499 monthly second income

Harvey Jones crunches the numbers to show how it's possible to build a long-term second income by investing in a…

Read more »

Investing Articles

I’m considering buying more of this struggling FTSE 100 stock

This FTSE 100 stock hasn't exactly set our writer's portfolio on fire during the time he's owned it. But Paul…

Read more »