For the past few years, the average rental yields on buy-to-let properties have been steadily declining as investors have piled into the market, pushing up the cost of properties. Rents have increased as well, but they’ve not been able to keep up with home price growth.
At the same time, the government has introduced a whole host of new regulations and taxes for retail landlords that have made it harder to earn a decent income from buy-to-let property.
According to my research, investors entering the buy-to-let market today can still achieve yields in the region of 5% — if they know where to look. Although, after including all the additional costs and taxes of operating a buy to let property, I’m not really sure it’s worth the effort.
Indeed, right now the FTSE 100 supports an average dividend yield of 4.6% and owning this index requires no additional input on your behalf. Furthermore, you can own an FTSE 100 tracker fund inside a Stocks and Shares ISA, which means you have no further tax obligation on any dividends received.
The fact that UK equities now offer the highest level of dividend income in the world only adds to the appeal, in my opinion.
The world’s best dividend index My research shows the FTSE 100, with its dividend yield of 4.6%, offers the most substantial yield of any developed market stock index. It’s the second highest yield on the global stage after the FTSE Emerging Europe’s 5.5% yield although, with just 82 Eastern European stocks making up this index, I wouldn’t put it in the same bracket as the FTSE 100.
It’s not just the UK’s leading blue-chip index that offers an unrivalled level of income. The FTSE All-Share Index, which is made up of more than 600 of the UK’s 2,000+ listed companies, currently yields 4.3%, its highest yield since 2009. Meanwhile, the FTSE 350 higher yield index yields an eye-popping 5.9%!
A Brexit problem We can trace these high dividend yields back to Brexit. Since June 2016, investors all over the world have been selling UK stocks as uncertainty surrounding the country’s future relationship with the EU grows. Investor selling has pushed stock prices down, and dividend yields up, resulting in the yields we see today.
However, I believe this could be an excellent opportunity for value-seeking investors all over the world. You see, the FTSE 100 is an international index with more than 70% of profits coming from outside the UK. So even in the event of a messy Brexit, I am confident the index will continue to distribute a healthy level of income to investors.
The same can be said about the FTSE 350. This index is made up of the FTSE 100 and FTSE 250 stocks and, because companies in the FTSE 100 tend to be bigger, they dominate the index. So, once again, I think the FTSE 350 will continue to be an attractive income investment no matter what happens with Brexit.
That’s why I believe UK dividend stocks are currently a better investment than buy-to-let. Not only do they offer a higher return for less effort, they also offer international diversification.
Rupert Hargreaves owns no share 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.
Motley Fool UK 2019