Forget buy-to-let. I’d rather collect 10%+ from this FTSE 250 dividend stock

Roland Head believes that returns from these FTSE 250 (INDEXFTSE:UKX) stocks should beat buy-to-let.

| 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.

According to research published last year, buy-to-let rental yields in London ranged from 4.8% down to just 1.9%, based on current house prices.

Things were better outside the capital, but credit specialists Totally Money could only find 10 postcode areas in the UK with rental yields above 8%.

For new landlords, I believe that real returns are likely to be very much lower than this. Totally Money’s theoretical yields were calculated ‘gross’, by comparing rents with property prices. They didn’t include the cost of mortgage interest, repairs, insurance, or empty periods between tenants.

Should you invest £1,000 in Unilever 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 Unilever made the list?

See the 6 stocks

In my opinion, anyone buying a house to rent today will be lucky to make more than 5% per year. I think there are much better options elsewhere.

How to earn 10% from housing

FTSE 250 group Galliford Try (LSE: GFRD) is an unusual mix of construction firm and house-builder. Shares in this hybrid firm have dipped by about 45% over the last two years, as the company has fallen dramatically out of favour.

This collapse is partly due to general concerns about the outlook for the construction and housing sectors. But Galliford’s slump has been made worse by some company-specific problems which followed the failure of Carillion.

As a result, Galliford shares now trade on just 5.3 times 2019 forecast earnings and offer a 10% dividend yield.

This must be too risky?

You might think that this extreme valuation is a sign of problems ahead. Normally, I would agree with you. But in this case I think the market sell-off has probably gone too far. The shares appear to be priced for a disaster, but there’s no sign of this at the moment.

The group has recently won two major road-building contracts which form part of an £8bn framework awarded by Highways England. Meanwhile, the performance of its house-building division, Linden Homes, is said to have been in line with expectations in 2018.

Other house-builders are also reporting stable performances with a strong outlook. In my view, Galliford’s 10% dividend yield could make the stock a more profitable investment than buy-to-let at the moment.

Another way to profit from buy-to-let

If you own one or two buy-to-let properties, your risks are highly concentrated. One-off costs like boiler repairs or new kitchen appliances can put a big dent in your rental income.

An alternative way to invest in the rental sector is through Paragon Banking Group (LSE: PAG). This lender specialises in buy-to-let mortgages, which accounted for 72% of new lending during the final three months of 2018.

Paragon’s performance has been consistent and profitable in recent years. The firm’s return on tangible equity — a key measure of banking profitability — rose to 16.1% last year, while underlying pre-tax profit rose by 7.8% to £156.5m.

One attraction is that the group is able to fund an increasing amount of its lending using customer deposits made into its savings bank. Deposits are generally much cheaper than any form of borrowing for a mortgage lender, so by doing this Paragon can remain competitive and enjoy decent profit margins.

This lender has been in business since 1985, so it’s survived several boom and bust cycles already. This gives me confidence in the long-term outlook for the business. With a well-covered dividend yield of 5.2%, this is a stock I’d consider buying.

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Here’s how a 40-year-old could start investing £100 per week to retire early

If a 40-year-old decides to start investing today, here's how they could potentially turn £100 a week into over £500k…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

The FTSE 100 is up 60% in 5 years. Here’s why — and a big lesson!

The flagship FTSE 100 index has put in a very strong performance over five years. There's a specific reason for…

Read more »

Investing Articles

How much do investors need in an ISA to earn a £2,500 monthly passive income?

Charlie Carman explores how investors could strive for £30k in tax-free passive income each year from a dividend stock portfolio.

Read more »

Investing Articles

How much would a 45-year-old need to invest in an ISA to earn a £1k monthly passive income at 65?

Harvey Jones looks at how much an investor would need to put away every month to build a steady passive…

Read more »

Investing Articles

3 things to do ahead of the new 2025-26 ISA year

It's time for us all to put on our investing boots and get to work on developing our plans for…

Read more »

Older couple walking in park
Investing Articles

Is £150,000 enough to generate £1,000 a month in passive income?

Stephen Wright takes a look at three UK stocks with dividend yields above 8% that passive income investors might be…

Read more »

Investing Articles

Aim to earn a £50k second income in retirement by investing just this much each month

Even with a small monthly investment, it’s possible to earn a £50k second income with a successful investment strategy and…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Down 22% in a month! Is this my chance to buy shares in this FTSE 100 outperformer?

Shares in InterContinental Hotels Group have outperformed the FTSE 100 over the long term. So is a chance to buy…

Read more »