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Forget buy to let! I’d buy bargain FTSE 100 dividend shares today

Peter Stephens
Hand holding pound notes

House price growth in many parts of the UK over the last decade means that buy-to-let investments may no longer be appealing from a valuation perspective. In fact, the average house price versus average wages is close to a record high. This suggests that affordability may become an increasingly important issue for investors across the sector.

The FTSE 100, meanwhile, appears to have numerous opportunities to buy high-quality stocks at discounts to their intrinsic values. Even after a decade-long bull market, the index could offer higher income returns, as well as greater capital growth, than a buy-to-let investment over the coming years.

Cyclical markets

The stock market and property industry are both highly cyclical. Their track records show that they have never experienced unchecked growth over the long run, which means that investors have been able to able to adopt a strategy of buying low and selling high.

At the present time, there appears to be an opportunity for investors to switch from property to shares on valuation grounds. The housing market is being boosted by factors such as low interest rates and government policies that are unlikely to last in perpetuity. This means that should there be changes in either of these areas, the unaffordability of homes in many parts of the UK may lead to a disappointing period for house prices.

By contrast, the FTSE 100’s valuation suggests that it is at a low ebb despite more than doubling in value over the last decade. Its 4.5% dividend yield is historically high, while many of its major incumbents trade on price-to-earnings (P/E) ratios that are well below their intrinsic values. This may create a buying opportunity, with an investor having the chance to build a solid portfolio of stocks that can deliver impressive long-term total returns.

Risk factors

Of course, the stock market also faces risks that may derail its performance in the short run. Notably, the global trade war is showing little sign of abating despite ongoing negotiations between the US and China. Meanwhile, fears surrounding the strength of the eurozone economy may lead to uncertainty for some of the FTSE 100’s members, and Brexit could, of course, cause investor sentiment to change over the medium term.

However, those risk factors appear to have been factored in by investors in the stock market. The FTSE 100 trades below its record high at the present time, which suggests that investors are not anticipating a clear bull run over the next few years. This is in contrast to house prices, which appear to offer little or no margin of safety following their rise over recent years.

Therefore, on a risk/reward basis the FTSE 100 appears to have greater appeal than buy-to-let investments. Over the coming years, the stock market could offer a relatively high income return, as well as impressive levels of capital growth.

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Peter Stephens 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