If you’re interested in generating consistent income from your existing capital, you might consider buying a rental property or investing in dividend stocks, or both. There are many options for generating passive, recurring revenue from an initial investment, but rental properties and dividend stocks are two of the most common.
Similarities Between Rental Properties and Dividend Stocks
Let’s start by looking at the factors that make rental properties and dividend stocks similar:
A path to consistent revenue. First and foremost, you have the possibility to generate revenue. For a dividend, this is simple; a dividend-paying stock will issue payments to shareholders (typically quarterly) based on the amount of stock they hold. In many cases, this dividend rate adds up to 2 to 4 percent of your held value, annually. With a rental property, you’ll collect rent from tenants in an amount exceeding your total expenses. Your rate of return will vary, depending on your neighborhood, the property condition, and more.
Potential for long-term growth. In addition to generating revenue, each type of asset has the potential to achieve long-term growth, adding to your total position. For example, a rental property may appreciate over time, allowing you to sell it for a profit at some point in the future. A dividend stock may increase in price, charting a similar path of growth.
Passive revenue generation. Each investment type can also be passive. You will have practically no major responsibilities as a typical dividend stock shareholder. As a rental property owner, you’ll be responsible for finding tenants, managing the property, and collecting rent, but you can always hire a property management company to take care of this for you.
Now, let’s study the differences.
First, the capital demands of a dividend stock and a rental property are very different. You can buy some dividend stocks for a few dollars per share, but to purchase a rental property, you’ll need to put up a down payment—sometimes tens, or even hundreds of thousands of dollars. In this respect, the barrier to entry for rental properties is much higher.
Growth rates also vary. The historical return of the S&P 500 index is around 9.25 percent, annually. Overall, real estate prices in the United States have risen, but the rate of return is much more contingent on local variables. Some regions see far higher growth rates, and some see far lower growth rates. Some are marked by extreme volatility, while others are more consistent. You may not see a reliable 9.25 percent rate of growth on your rental property’s price, but you can make up for that with higher profitability on your rental income in many cases.
In some ways, dividend stocks are a better choice if you’re interested in diversifying your portfolio within a specific class of assets. Obviously, you’ll need to diversify your portfolio from a broad perspective; you’ll want a mix of assets like stocks, bonds, and real estate to protect yourself from risk.
Within the realm of dividend stocks, it’s easy to purchase the stock of many different individual companies. You can purchase as many or as few shares as you want, choosing from thousands of blue chip, recognizable companies. You can also choose to buy into an exchange traded fund (ETF) that grants you exposure to many dividend-paying stocks simultaneously.
However, if you want to diversify your holdings in real estate, you’ll need to purchase a multifamily dwelling, or multiple properties. This is certainly possible, but it has greater capital demands, and in some cases, greater responsibilities.
Stocks tend to have a high rate of return long-term, but in the short- to mid-term, they’re much more volatile than other types of investments. In a given year, prices may rise, fall, or remain the same. While the real estate market certainly has occasional downturns, it tends to be much more reliable and consistent than the stock market.
It’s also important to note that the overall pros and cons of dividend stocks and rental properties probably aren’t as important as the individual choices you make in each field. Some rental properties will be much more lucrative than others, and some dividend-paying stocks will be much more rewarding than others. It’s vital to do your due diligence no matter what.
The Bottom Line
The bottom line here is that both rental properties and dividend stocks are good investments for a savvy, revenue-focused investor, but they offer distinct advantages and disadvantages. You’ll have to consider these pros and cons carefully when adding each class of asset into your long-term investment or retirement strategy.