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Forget buy-to-let! I’d buy and hold this FTSE 100 dividend hero

Conor Coyle
Graph of price moves

Once upon a time, purchasing a buy-to-let property was a no-brainer for many investors who wanted a steady return on their investments.

Nowadays, with property prices higher across the board (even with a slowdown) and rental prices struggling to keep up, many are questioning the value of buy-to-let investments and how profitable they can be in the long run.

Reforms aimed at so-called ‘portfolio landlords’ from the Bank of England’s Prudential Regulation Authority (PRA) and HMRC have hit those trying to maximise returns from multiple properties hard.

Higher tax rates have scared off plenty of potential investors from the buy-to-let market, while those already in it have been weighing up their options as the weight of regulation erodes their returns.

While in some cases property owners have not been as badly affected (cash buyers, for example), I believe now is a good time to start thinking about alternative investments, such as FTSE 100 stocks.

Dividend heroes

Buy-to-let investors are often attracted by the dependability of the rental market, and can be put off buying stocks due to the perceived volatility of the equity market.

For that reason I would suggest having a look at some big FTSE 100 dividend stocks which have a history of paying out sizeable dividends to shareholders.

One of those is insurance giant Aviva (LSE:AV), which has seen its dividend per share rise 100% in the last five years. Currently the dividend yield stands at 7.1%, although its struggling share price is a key reason for that unusually high yield.

But annual dividend increases have also had an effect and have continued despite Aviva’s share price underperforming in the last two years or so, which came about in response to various rounds of internal restructuring from the company.

Former CEO Mark Wilson stepped down in October 2018 after a long-running battle with shareholders, and it took Aviva until March of this year to appoint a replacement.

Increased stability

In the last 12 months the Aviva share price has fallen more than 20%, but since Maurice Tulloch’s appointment the stock has plateaued, and I see it potentially gaining ground as it leaves that instability behind.

Significant improvements in Aviva’s balance sheet are testament to that. Full-year results published in March showed earnings per share (EPS) up 7% to 58.4p, ahead of analyst expectations. Strong performance from the firm’s life and general insurance business drove the outperformance according to Aviva, despite higher central costs.

As has been commented previously on here by Kevin Godbold, the volatility of the share price in recent years would suggest Aviva is a risky buy despite its solid dividend yield, but I feel this volatility may not continue in the long term.

With the current P/E ratio of 11 now a lot closer to the insurance industry average of 12, the early signs are positive that the new leadership is on the right track for growth.

All things considered, both dividend and growth prospects for Aviva look strong for me and a more attractive investment than buy-to-let.

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Conor Coyle has no position in any of the shares 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