Many investors love rentals. More millionaires have been made from real estate than any other asset class.
When I ask investors about what they like about rental properties, the obvious answer given is the rent checks. Then asked if they care if the property drops in value, they usually answer, no, as long as they get the rent checks.
There is a similar opportunity in the stock market and without some of the headaches real properties have such as having to deal with tenants, late rents, rent moratoriums, leaky roofs, insurance, liability exposure and hefty commissions when one decides to sell a property. Add in property taxes and possible tax assessments and the hassles become pretty obvious.
An option is what I call a “Stock Rental Portfolio” which can pay just like a rental but with some definite advantages utilizing dividend paying stocks.
Dividends are payments by companies whose stocks you own. Dividends can be cut, eliminated or increased at the whim of the Board of Directors, but there are many reasons why they would not want to do that.
The members of the board probably have stock themselves, so if you get a dividend, so would they. Tax rates on dividends can also be less then tax on income, so in lieu of a big salary, VPs might opt instead for lots of stocks, reap the dividends and possibly pay less in tax.
A group of stocks called “Aristocrats” have not only paid dividends for more than a quarter of a century or more, but have increased them every year for the same amount of time or more (a requirement to make the Aristocrat list). Some have paid dividends and increased them every year for over 50 years! Some even longer.
How many landlords out there can say can they increase their rent to their tenants every year?
Probably not many.
But Aristocrats stocks by definition have to in order to remain on the Aristocrat list, and the Board has every incentive to maintain the record of increases to remain an Aristocrat.
The board also knows should they break the streak of increases, their stock would likely get punished as not increasing the dividend may mean there are financial issues preventing them from doing so, not to mention angering stock holders who expect annual increases.
With a dividend portfolio, there are no tenants, no property tax, no maintenance costs, no vacancies, and no huge sales commissions. There are also no long wait times to liquidate like waiting for a buyer or long escrow to cash out. Stocks can usually be sold in microseconds when the markets are open.
Can stocks drop in price?
Sure they can, but remember landlords tell me they don’t really care if the rental drops in value as long as they get their rent checks. So if stocks drop, but the Aristocrats keep their history of paying dividends intact (and increasing them every year to boot), you will still get your “rent”.
With the advent of the rent moratorium, inflation pushing maintenance and insurance costs up, taxes going up, more wildfires, increasing mortgage rates, memories of the 2008 housing crash, and more consumers struggling, the threats to landlords and their financial stability is on the increase.
With the possibility of lower tax rates on income through dividends, essentially zero commissions to buy or sell these stocks through the use of discount brokers who offer commission free trades, zero property taxes, no tenant problems such as midnight calls or unpaid rents, instant liquidity and no maintenance costs, there is a lot to like about a “Stock Rental Portfolio’.
In conclusion, I used to be a landlord, and loved the rent checks. But as time wore on and the hassles of the rentals properties and their tenants increased, I sold all my properties and instead now hold many an Aristocrat dividend-paying stock.
Should the boards of directors of these companies elect to stay on the Aristocrat list, and they have every incentive to, I will continue to get higher and higher payments every year, without all the threats to my financial picture as rental properties can expose me to, and without all the problems and landlord stress as well.
“Watching the markets so you don’t have to”
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Dividends can be cut or eliminated at any time and do not guarantee against losses. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, SDSU, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was recently voted Best Financial Advisor in Nevada County. 530-559-1214
