The income return of buy-to-let properties has fallen in many parts of the UK over recent years. Rising house prices and modest rental growth have combined to cause the gross income returns on property to decline.
Combined with this, rising tax rates for many landlords mean that the net return from buy-to-let properties is unattractive in many cases.
As such, now could be the right time to buy these two FTSE 100 shares. They offer high income returns, as well as the scope for dividend growth over the long run.
Aerospace and defence company BAE (LSE: BA) released a relatively positive trading update recently. It stated that it is on track to meet guidance for the full year, and that its bottom line could rise at a mid-single-digit pace when compared to the previous year.
Since the company has faced an uncertain period in recent months, this would be likely to represent a success in the eyes of many investors. Factors such as a global trade war and geopolitical risks concerning some of its major customers have meant that investors had become increasingly cautious about the company’s financial prospects.
However, with BAE’s dividend cover expected to be around two in the current year, its income investing prospects may prove to be relatively reliable.
Its dividend yield stands at 4%, which is below the FTSE 100’s 4.5% income return. However, with its free cash flow expected to be in excess of £3bn over the 2019-21 financial period, its scope to raise shareholder payouts could improve over the medium term. As such, it could become an increasingly attractive income investing opportunity.
Another FTSE 100 share that has faced an uncertain 2019 is United Utilities (LSE: UU). The water and wastewater services business has experienced significant regulatory and political risks that may yet have further to run. This could mean that its shares are less in demand among investors than would normally be the case given its defensive business model and the uncertain outlook across the world economy.
With a dividend yield of 4.9%, United Utilities offers an above-average income return compared to its FTSE 100 index peers. Its dividend growth prospects may be more limited than some of its large-cap peers, but the reliability of its shareholder payouts in a wide range of economic scenarios may make it a worthwhile purchase for the long run.
Clearly, the general election result will have a significant bearing upon the company’s future. However, with the stock appearing to offer a margin of safety at the present time, it could be argued that investors are factoring in the prospect of an uncertain future for the business. Therefore, an opportunity may be present to buy the stock while it offers a high yield and rising dividend over the coming years.
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Peter Stephens owns shares of BAE Systems. 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