The Moneygardener recently wrote an interesting post why he likes to invest in dividend paying stocks instead of investing in real estate (I’d link to the post, but I’ve been getting 404 errors from his site for the last 2 days). As someone who has invested in both, there’s truth to each point he makes (I agree with all of them), but there’s also another side to the issue.
Presented, for your consideration, some reasons why you might want to invest in real estate instead of equities (text in italics are the original points made by MoneyGardener):
No pesky rent cheques to cash. My dividends flow electronically into my brokerage account without hassle, fees, or paper (eco friendly too).
- Pesky rent cheques to cash. Dividends may trickle in (or be re-invested in your DRIP), but there’s nothing like walking to the bank with cold hard cash or a stack of cheques in hand
If given the choice I’d rather not receive phone calls at 4am from tenants with plumbing issues. To date I have not received one phone call from any of the companies that I own.
- Given the choice, I’d like to have the opportunity to know about problems with my investment, have the chance to fix them, and to be able to plan to avoid them in the future. With companies I buy common stock for, I don’t know about problems until the over-paid management team has already made short-sighted decisions to maximize the value of their stock options
Why chase people for rent cheques or listen to a hard luck story about why it’s late? Clorox (CLX) is never late with their quarterly dividend, and they don’t complain.
People break leases and decide to move out occasionally, taking your future monthly rent with them. Stocks never go away unless you want them to. They can also be acquired in which case their value spikes.
- When a company cuts or suspends it dividend, there’s nothing I can do about it. My entire investment can disappear, leaving me with no recourse, no future income AND the loss of my principal. If a tenant doesn’t pay me, I have a wide range of options for collecting ranging from nagging him to evicting him. Buildings rarely vanish, and even if its destroyed, the land its built on will still remain (along with a juicy insurance settlement).
I like the word ‘DIVIDEND’ better than the word ‘RENT’….it just sounds cooler and more profitable.
- Rent sounds a lot cooler when you’re collecting it than when you’re paying it!
Owning stocks I can diversify across industries and geographies. Owning an 18 unit apartment building in Windsor, Ontario, I can not.
- With real estate, I can learn the local market and exploit inefficiencies, buying property that no one else is interested in (and getting an appropriately good deal). With the amount of information available to stock buyers, the market efficiently prices them, making it hard for me to get a good deal. I will always have to bid against other people interested in buying.
My stocks do not require maintenance that involves getting my hands dirty or paying someone else to dirty theirs.
- I can get my hands dirty, and increase the value of what I own by investing my labour in it.
Stocks are liquid. It would take me about 10 minutes to sell every stock that I own in an emergency. It could take years to sell real estate in a poor market.
- Real estate is illiquid. Because I’m not getting it appraised every 10 seconds of the day, I won’t get panicked when real estate prices go down. I won’t even know about it unless I try to sell. I can easily sit back and be a long term investor without distractions.
I don’t have to decide by what percentage to increase the rent, the companies that I own decide that for me.
- I get to decide by what percentage to increase the rent, instead of companies deciding that for me.
Again, to reiterate, I’m a dividend investor (I don’t want the Dividend Addicts coming after me with pitchforks). I like stable blue chips that regularly pay an increasing dividend. I just don’t think that there’s an investment that’s absolutely better than others (or else everyone would just buy the better one).
And as a little bonus (so there’s no hard feelings from the Gardener), I’ll switch sides and gives three more points in favour of dividend investing:
- When I invest in stocks my transaction costs are tiny (a fraction of a percent for a large buy). With real estate, about 7% is paid in fees (legal + agents) every time it changes hands. These expenses scale with the size of the purchase, whereas they are proportionately lower for stock transactions.
- With real estate you have to check on your investments periodically, even for the best run properties with property management in place. With stock, I can go and sail around the world, content that they’ll operate as well with me absent as they would if I was checking them every day.
- Discount stock brokers rarely cheat clients, property management companies are notorious for underhanded behaviour.
What are your reasons for investing in real estate or dividend paying stock?