Several years ago I decided I would rather invest in FTSE 100 dividend shares than a buy-to-let property. Subsequent events have confirmed I did the right thing.
The Government has been taxing buy-to-let investors for years, in a bid to level the playing field with first-time buyers. This has destroyed the investment case for becoming an amateur landlord, while doing little to help young buyers.
These dividend shares offer superior yields
Investors now get all of the bother of buy-to-let, but few of the financial benefits. By investing in dividend shares instead, I expect to avoid all the trouble involved in maintaining the property, finding tenants and possibly evicting them if they can’t afford to pay their rent as the cost-of-living crisis bites. That’s the last thing I want on my conscience.
Investing in shares has its risks, but it is much less stressful than trading physical bricks and mortar. I can buy and sell in seconds, and take all my returns free of income tax and capital growth, inside my Stocks & Shares ISA allowance.
I can still tap into property market performance by investing in the shares of top UK housebuilders. The income is better too. While buy-to-let yields of 5% or 6% are typical, FTSE 100 listed Persimmon (LSE: PSN) currently yields 16.5% a year.
That is a ridiculously high dividend income, and I cannot imagine it is sustainable. Especially with cover now slim at 1.1%. The yield has been driven up the falling Persimmon share price, which is down by a third in three months, and 50% in a year.
One reason is that pre-tax profit for the six months to June 30 fell 8.3%, from £480m to £439.7m, while housing completions fell, too. The property market is clearly not going to escape today’s inflationary storm unscathed, and neither will Persimmon.
Buy-to-let is too much bother for me
Yet this is hardly a company in trouble, as sales prices are still rising slightly and demand is “strong”. Also, I also think much of the problems have been priced in. Persimmon trades at just 6.1 times forward earnings, so I am far from overpaying. I would buy this stock over a physical property for sure.
The same applies to fellow FTSE 100 housebuilder Barratt Developments (LSE: BDEV). Its share price has also taken a hit, down 17% over three months and 44% over a year. Yet in July, management said annual profits were on track to beat forecasts of £1.048bn, as sales return to pre-pandemic levels and average selling prices climb £11,200 to £300,000.
Chief executive David Thomas said rising completions and strong forward sales give Barratt the “resilience and flexibility” to defy the economic uncertainties ahead. The dividend yield is lower at 7.1% but cover is strong at 2.2. That’s a forward valuation of 5.2 times earnings, which makes it looks good value as well.
Buying these two dividend shares looks like a much more straightforward way to generate the income I need for retirement than becoming a buy-to-let landlord.