7 Reasons Dividend Stocks Beat Real Estate Investing (Part II)

This Old Investment.

In Part 1 of this series I covered the first three reasons dividend stocks beat real estate investing:

1) Low Initial Investment

2) No Financial Leverage

3) No Management Overhead

In this Part I’ll review reasons 4 through 7 on why dividend stocks are a superior investment to real estate.

4) Small Incremental Investments:  Like the initial investment in item #1 in Part 1, you can add to your dividend stock portfolio in dribs-n-drabs as your cash flow allows.  This makes it easier to compound your investments and / or diversify them if you wish.

Try adding a piece of rental real estate to your investment portfolio for 50 bucks a month.  The only way you can do it is with a dividend paying Real Estate Investment Trust (REIT) purchased just like any other stock.  ‘Nuff said.

5) Positive cash flow:  All the time (almost).  When you buy dividend paying stocks, particularly solid stocks, you can pretty well count on getting positive cash flow every month for stocks paying monthly or quarterly for stocks paying every three months.  If the dividend gets cut, your cash flow goes to zero, but not below that point.

With real estate you can easily and regularly experience negative cash flow.  If you get into a fix-n-flip, you’re cash flow will be negative from the time you buy the property to the point you sell it – and possibly thereafter if you have to sell during a market dip.

In the rental market, you can regularly count on having negative cash flow several months out of every 12 once you factor in the rent / re-rent phases of ownership.  Should you have any repairs along the way, you might have several months each year of negative cash flow or even an entire year, despite having a renter on prem, if the repair has a hefty price tag.  Of course, if you have the coin to purchase a rental for all cash, it’s easier to experience positive cash flow nearly every month.  If you could do that, though, you wouldn’t be reading this post.

6) Real Compound Growth:  When you buy a dividend paying stock and let the dividends reinvest, you get additional shares of stock.  These shares pay future dividends which buy more stock which pays more dividends and so forth.  You may start with a few shares (pieces of a company) at the age of 23 and wind up with thousands of shares (pieces of a company) at retirement through compounding alone i.e., without adding anything out of pocket.  This is what I refer to as real compound growth.

With investment real estate you get compound growth as well – on paper.  For instance, if you buy a $100,000 property that appreciates at 2% per year, you’ll have a property valued at $102,000 at the end of the first year and $104,040 at the end of the second year.  However, you’ll still have only 1 property, not several and certainly not thousands by the time you retire.

In both cases, div stock and real estate, you can see value appreciation (or depreciation), but in only one will you see actual pieces added to your monopoly board through compounding.

7) Risk Diversification:  Because you can purchase dividend paying stock in small increments, relative to real estate, it’s much easier to diversify away risk.  With stock, you can spread your money, however little or much, across multiple firms.  As a result of this, you significantly limit the probability of a catastrophic event causing your entire investment to go to zero.

Real estate normally requires putting all your money into one property.  Because you can’t easily diversify across multiple properties, let alone multiple properties in different regions or geographies, you can’t reduce the possibility of a catastrophic event driving your investment to zero.  What’s more, a single catastrophic event with a real estate investment can plunge you into large, negative financial territory if you use leverage (debt) which you almost certainly will in order to invest in the first place. 

I’ve flogged this horse long enough.  I can’t recommend real estate investing to anyone and certainly can’t do so when dividend stocks are available.  If I could, I’d recommend annuities while I’m at it, but in 9 Reasons Dividend Stocks Beat Annuities, you’ll learn why I can’t do that, either.  Apparently, I’ve become an old curmudgeon.  Until next time, happy dividend investing! 

The thoughts and opinions expressed here are those of the author, who is not a financial professional, and therefore should not be considered as investment advice.  This information is presented for education and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.