There are many ways to make money as an investor. Some attempt to build a UK buy-to-let empire to supplement their income in retirement. But I think there’s a much better way. For me, it’s buying cheap FTSE 100 shares.
The admin requirements for buying and holding buy-to-let property are extensive, time-consuming and often confusing. The capital outlay is weighty. You’d better have amassed a small fortune before you even start.
That’s before we consider the harsher tax treatment for buy-to-let landlords that makes these property investments much less attractive.
Buy to let again
The UK property market is in a constant state of flux. And while there are maps of the best-returning rental areas across England and Wales, these change constantly.
Headline yields of 8%, 9% or 10% a year can compete with the best cheap FTSE 100 shares, certainly. But there is no real way to rely on the income from buy to let. Bad tenants are everywhere.
Yes, background checks can weed out the worst of them. But if a good tenant falls into financial difficulty through no fault of their own, you could lose out on rent for months at a time. That’ll kill those 8%-10% yields. And with the UK jobs market shrinking and unemployment rising, there are far too many unknowns on the horizon.
Depressing July 2020 forecasts from the OECD says that the UK jobless rate is likely to triple to nearly 15% if we are hit with a second coronavirus wave.
Buy cheap FTSE 100 shares instead
Buying FTSE 100 shares, by contrast, is remarkably easy. I set aside a few hundred pounds a month and buy top blue-chip shares like BP, Royal Dutch Shell and Legal & General.
With my ISA and SIPP provider, Hargreaves Lansdown, I get a discount on the cost of buying shares because I do so in regular amounts every month.
Now is one of the best times to buy cheap FTSE 100 shares because the choice is wide and the potential returns greater than they have been for some time.
The Bank of England has said that the UK economy likely won’t return to where it was pre-pandemic until late 2021. That means there are plenty of quality companies experiencing a short-term share price dip. Buying cheap FTSE 100 shares now offers the chance for share price appreciation as confidence creeps back into markets. You also get dividend payments as a bonus for holding on to stock.
Reinvesting dividends
Most Stocks and Shares ISAs allow you to automatically reinvest dividend payments. It’s a low-stress process that requires zero brain space.
Recently I saw the fruits of my regular investing process.
For buying up 457 shares in Legal & General, the company paid me a dividend of 12.64p per share. That equals £57.76.
I didn’t take that cash out of my Stocks and Shares ISA as income. Instead the ISA automatically reinvested the money to buy more Legal & General shares.
These small incremental gains will mean that in 10 years time I will have amassed a serious amount of LGEN shares, with my dividend payments growing in turn every year.
Even if I didn’t already own LGEN stock, at a dividend yield of 7.65% and a low P/E ratio of 7.4 times earnings, I’d be happy to invest in these cheap FTSE 100 shares.