Dividends paying stocks versus Real Estate

Defining Assets
Assets, those things which have monetary value, fall into classes. One asset class is common stock, such as the common stock of IBM. Another asset class is real estate, such as a house or commercial building. Each asset class is a thing of value, but one is far easier to establish and maintain than the other. Below are the reasons why some people prefer investing in dividend paying stocks instead of investing in real estate.

Getting into the Investment Game
It's far easier to invest in stocks than to invest in real estate. Indeed, you can buy a high quality dividend stock such as Johnson & Johnson for your newborn baby, and let that stock work its compounding magic until he or she is an adult. And if your children continue with the dividend reinvestment until they have children, the account growth can be astonishing. (Johnson and Johnson has not only paid, but increased its dividend for the past 48 years). It's very unlikely you'd buy your newborn a starter home. Real estate is difficult to get into ... it requires negotiating a price, providing a down payment, and qualifying for a loan. It's a complicated and expensive process.

The Hidden Cost of Real Estate
Dividend paying stocks cost you nothing to maintain, other than the tax which may be due on your dividend income. But income tax is not a true cost, it's a reflection of income. While never pleasant to pay tax, the implication is good: you earned income - your investment paid you!

And unlike real estate, dividend paying stocks do not require painting, a new roof, a new furnace, or gardening. Dividend paying stocks do not require a security system, suffer from fires or floods, or cause you worry when you're away from them. Dividend paying stocks never have a water bill, or energy bill, or garbage collection bill.

Real estate is expensive to buy, and as homeowners find out, expensive in terms of time and money, to keep.

Real estate is a physical asset which like you and I, will age and break down! Dividends however do not age, and they do not break down. If anything, they tend to get better with time. This isn't to say you shouldn't periodically review and sell yout dividend paying stocks if it appears they're not growing old gracefully ... if a dividend paying company is under duress, such as we saw with General Motors in 2010, absolutely it should be sold and replaced with a healthier dividend paying stock. But many high quality dividend paying stocks fall into what might be called "buy and die". Buy them, benefit from them, and die with them (and pass them on to your family or favorite charity).

In addition to the costs of maintaining real estate, real estate requires two other expenses which can only go up over time: property tax, and homeowners insurance. And, these expenses can grow dramatically, especially property tax. Indeed, property tax can turn out to be one of the single largest expenses a real estate owner will face.

Selling Costs and Liquidity
Like buying real estate, selling real estate is expensive, complicated, and time consuming. If you own real estate worth $100,000 and decide to sell it, expect at least a month or more of your time and a large stack of paperwork. And you don't keep the entire $100,000 - there are certain expenses that go with selling real estate such as presale repairs, inspections, and real estate sales commissions. What is the transaction cost of selling $100,000 worth of stock? Almost nothing, perhaps a brokerage fee of $15.

When it comes to liquidity, stocks win easily. If you decide to sell real estate, you'll see your money in a month, at best. When you sell stock, your money is usually available within three days.

Summary
Dividend investing is a relatively easy method of creating wealth if measured against the amount of management required for an asset like real estate. It's inexpensive to start, easier to manage, and easier to liquidate. And it can create returns matching if not exceeding real estate. Real estate too can be a good investment, but it requires much more time and expertise and may not be suited to the average investor.

If it's a house you want, make it your own house and enjoy your home. If it's an investment you want, investing in a house can be a challenge - if wanting to participate in real estate, consider dividends from a REIT. Dividends may sound stodgy, and boring, but they tend to pay.