There are lots of good reasons to be worried about buy-to-let. Tax and regulatory changes mean that costs are rising for many landlords.
Nightmare tenants, unexpected property repair costs, and long void periods are also a constant risk, as my colleague Alan Oscroft explained recently.
On top of that, house prices in many areas of the UK have risen faster than rents in recent years, meaning that rental yields are lower than they used to be.
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It seems to me that the only sensible way to do buy-to-let is as a full-time business, not as a small-scale sideline. That’s why I prefer to put my spare cash into the stock market.
But doing this doesn’t mean I can’t benefit from exposure to the UK’s fast-growing rental market. Today, I’m looking at two dividend stocks which both provide a useful dividend income and exposure to the property market.
Doubling down on housing
On Monday morning, outsourcing specialist Mears Group (LSE: MER) revealed plans to buy the housing maintenance business of rival Mitie Group (LSE: MTO) for up to £35m.
Mears is one of the bigger operators in this sector and generated revenue of £766m from social housing in 2017. Mitie’s operations are expected to add a further £100m of revenue, plus £200m in new orders.
At first glance, the deal makes sense for both companies. Mitie will get some much-needed cash to help reduce debt and invest in its core operations. Mears will be able use its larger scale to improve the profitability of the Mitie business, which reported an operating loss of £0.8m last year.
To fund the initial £22.5m payment, Mears plans to issue new shares to institutional investors. News of this plan has left the group’s share price 6% lower at the time of writing, but I think it’s a prudent measure.
The group’s average daily net debt was 2.3 times EBITDA (earnings before interest, tax, depreciation and amortisation) during the 12 months to 30 June. That’s pretty high by most standards. Borrowing more would have been unwise, in my view.
Mears’ debt is a risk for investors. But the long-term nature of its business, managing social housing and other rented property across the UK, suggests to me that it could be a reliable dividend buy. The shares currently trade on about 11 times forecast earnings with a 3.7% yield. I think they could be worth a closer look.
What about Mitie?
Although Mitie will still have some property maintenance operations after this sale, the group’s outsourcing business is more heavily focused on facilities management services, such as cleaning and security. Like Mears, the group faces tough competition on price from rivals and is burdened with a significant amount of debt.
However, the company is currently in full-scale turnaround mode under chief executive Phil Bentley, who expects to deliver £40m of annualised cost savings at a cost of £15m during the current financial year.
Analysts expect Mitie’s underlying earnings to rise 2.3% to 17.2p per share this year, supporting a full-year dividend of 4.1p per share. These figures put the stock on a forecast P/E of 9, with a prospective yield of 2.8%.
These shares aren’t without risk but, in my view, its cost saving plan and shift towards technology-led solutions are attractive. As a turnaround buy with long-term potential, I think Mitie rates as a potential buy.
