Forget buy-to-let! I think this 10%-yielding FTSE 100 dividend stock is a better way to play property markets
In an article earlier today I explained why, despite recent nervousness among stock investors, share markets remain a much more attractive investment destination than buy-to-let.
Home-builders like Taylor Wimpey(LSE: TW) have suffered immensely as a result of the tougher buy-to-let environment. The raft of tax changes affecting landlords over the past couple of years has, in turn, sapped sales of properties for rental purposes. Most recent figures from Rightmove revealed the extent of this. The online property marketing portal said that the number of buy-to-let mortgage approvals fell 14% year-on-year in September. And compared with the same month in 2015, activity was down a shocking 53%.
Shrinking landlord demand has, of course, had a devastating effect on home prices insofar that the rampant price growth of yesteryear would appear to now be well and truly behind us. Latest figures from Halifax showed property values rose 1.5% in the three months to October, the lowest rate of annual growth since March 2013, to underline this point.
So unsurprisingly, City analysts are expecting earnings growth at the likes of Taylor Wimpey to slow to something of a crawl. Gone is the likelihood of double-digit-percentage improvements in annual profits enjoyed up to as recently as last year. The number crunchers are now anticipating bottom line rises of 4% in both 2018 and 2019.
That said, the trading environment still looks strong enough to support solid and continued profits growth both in the medium term and longer. And frankly, Taylor Wimpey’s ultra-low forward P/E ratio of 7.8 times doesn’t reflect this positive outlook.
More good news
I don’t think it’s difficult to come to any other conclusion. Talk of a collapse in the housing market has been doing the rounds ever since the infamous Brexit referendum of summer 2016. And yet, financial updates from across the house-building sector — bar from those with a particularly-high exposure to London — remain largely positive.
Persimmon this week declared that private sales had climbed 3% in the four-and-a-bit months to November, added that it was fully sold up for 2018, and that forward sales beyond this year were up 9% from the same point last year, at £987m. Redrow, meanwhile, advised in recent days that its order book had improved to £1.2bn as of November 3, up 11% on an annual basis.
Britain’s failure to get busy building means that demand continues to outstrip supply, exacerbated by the generous lending conditions that are helping more and more first-time buyers to get on the property ladder. And this gulf looks set to reign given that government housing policy remains quite impotent, to put it mildly.
I mentioned Taylor Wimpey’s low, low valuations, but this of course is not the only reason to invest. The likelihood of additional profits growth, supported by its strong balance sheet, means that City analysts are predicting dividends to keep growing as well. Consequently, the FTSE 100 builder boasts smashing yields of 9.3% and 10.8% for 2018 and 2019, respectively.
Taylor Wimpey and its peers prove that the property market can still provide plenty of investment opportunity. I reckon they are great stocks to load up on today, and are much better choices for how to spend your extra cash than by dipping into the hazardous buy-to-let segment.
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Royston Wild owns shares in Taylor Wimpey. The Motley Fool UK has recommended Redrow. 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.