Updated July 29, 2021 by Bob Ciura

Investing is about getting the highest possible return while minimizing risk. Of course, there are many avenues that investors can take to achieve this goal.

Two of the most common ways people invest are in the stock market and real estate. Dividend stocks versus real estate is a complex topic that has no one right answer. What works for one person may not work for another.

When it comes to dividend stocks, we think investors should focus on the Dividend Aristocrats, a group of 65 stocks in the S&P 500 Index that have increased their dividends for at least 25 consecutive years.

You can download an Excel spreadsheet of all 65 Dividend Aristocrats (with important metrics such as dividend yield and price / earnings ratio) by clicking on the link below:

Accordingly, there are many different points of view on this issue. If you ask 10 different investors which is better, you might get 10 different answers.

Each strategy has advantages and disadvantages, although studies over the years have shown that one approach can actually be better than the other.

This article discusses the various advantages and disadvantages of dividend investing over real estate investing.

Pros and Cons of Dividend Investing

Investing in stocks is one of the best ways to build wealth over the long term. Take a look at the historical performance of the S&P 500 Index:

Source: Multpl.com

The S&P 500 index recently closed just above 4,400.

On January 1, 2017, the S&P 500 Index stood at 2,275.12. On January 1, 1871, the index was 4.44 points. Over that 150-year period, the S&P 500 averaged 4.7% per year after inflation.

Dividend stocks can be even more rewarding. Take the list of Dividend Aristocrats, a group of companies in the S&P 500 that have been raising dividends for over 25 years.

The S&P dividend aristocrats have outperformed the broader S&P 500 index for the past decade. Still, the Dividend Aristocrats have posted strong overall returns of 14.5% per year over the past 10 years.

Source: Standard & Poor’s

The beauty of investing in dividends versus real estate is that dividend stocks pay you to own them, not the other way around.

Dividend stocks are a particularly attractive option for retirees as dividend income can help replace lost wages after retirement at a much lower cost than investing in real estate.

There are significant tax considerations involved in investing in dividends.

Taxes can be a disadvantage of dividend investments, especially if the investor is not using tax-privileged accounts such as IRAs.

Capital gains taxes, especially short-term interest rates, can affect the returns on dividend stocks.

According to the Internal Revenue Service, long-term capital gains, that is, gains on stock investments held for at least a year, are typically 15% for most taxpayers.

For those in the top normal income tax bracket, the long-term capital gains rate is 20%.

However, short-term capital gains are subject to taxation as ordinary income.

And if the shares are held in taxable accounts, investors will also have to pay tax on dividend income. Qualifying dividends are taxed at the same rate as long-term capital gains.

Even so, capital gains and dividend taxes are typically a much smaller tax burden than real estate taxes.

And there are tax-privileged accounts that dividend investors can use to protect themselves from taxes, like the Roth IRA.

Of course, the biggest downside to investing in dividend stocks versus real estate is that dividend stocks don’t offer a roof over your head.

Advantages and disadvantages of real estate investments

Comparing dividend investing to real estate investing isn’t always an apples to apples comparison. It’s not an either-or; In most cases, the dividend investor still needs an apartment.

The appeal of investing in real estate is that it allows investors to build equity and one day pay off their mortgage instead of paying rent to a landlord indefinitely.

Owning a home can help the homeowner build significant wealth while renting tenants over the long term without building up equity.

Real estate can also generate income, for example through renting, which, however, creates additional problems.

However, real estate has achieved relatively low returns on average over the past few decades.

Consider the Case-Shiller Home Index, a widely used measure of US home values. On December 1, 2017, the Case-Schiller Home Index stood at 197.02; on December 1, 1890, the index was 112.77 (all values ​​are adjusted for inflation).

This means that US residential real estate returned 0.4% per year in real terms over that 126-year period.

Now compare those returns to the S&P 500 index referenced in the first section – the historical annual returns of the S&P are P. more than 10 times that of real estate.

What real estate investors need to consider is the cost of owning a home. This can undermine returns on real estate investments.

So if someone tells you they bought a home for $ 200,000 and sold it for $ 500,000 30 years later, don’t assume they made a profit of $ 300,000.

Aside from a mortgage, there are a number of additional costs that real estate investors have to pay that tenants do not bear – only a few include mortgage interest, closing costs, home insurance, taxes and, if applicable,

And that doesn’t even include the cost of maintaining and maintaining a house in good working order, such as: B. new appliances, furniture, etc.

In some cases, a homeowner could even lose money from the cost of owning the property, even if they sold their home at a price much higher than what they paid for it.

Real estate investments have their share of benefits. For example, homeowners can deduct a portion of the mortgage interest paid annually.

Additionally, now is a pretty good time to buy a home. Home affordability remains solid in many US markets thanks to low interest rates.

While rates have risen since the Federal Reserve raised rates, the average rate on a 30-year fixed-rate mortgage is around 3.04%, according to Bankrate.

This is still low by historical standards. In the early 1980s, it wasn’t uncommon to see double-digit interest rates on 30-year fixed-rate mortgages.

Final thoughts

There is no one solution that works for everyone. There have been many investors who have made their fortunes in the stock market and many others who have done so in real estate.

The Dividend Aristocrats have outperformed the broader market – and real estate – with relatively little volatility. Essentially, investing in dividend stocks is the slow and steady road to wealth creation.

Real estate investing involves a great deal of leverage – if you’ve staked 20% on a home (which many homeowners don’t), you’ve borrowed 80% of the home’s value.

For a $ 500,000 home, that means investors borrow $ 400,000.

Leverage can increase returns. But, as many Americans learned the hard way during the 2008 housing crash, leverage works both ways.

Thanks for reading this article. Please send feedback, corrections, or questions to [email protected]


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