Real Estate Vs. Dividend Growth Investing

Includes: CVX, KO, O
by: Individual Trader


There is no such thing as a risky investment but only a risky investor. Now more than ever investors need to manage their own money.

Chevron is an excellent example of a dividend growth stock with good fundamentals. I would use any weakness in its upcoming earnings to go long.

Realty income provides a nice alternative to investing hands-on in real estate. The company has enjoyed a 13%+ annualized gain over the last 10 years.

There is a very good article here about this topic and it definitely is a very interesting area of discussion. In my point of view, investing comes down to one thing - buying assets that spin off positive cash flow every month. This is why I thoroughly agree with the author of the afore mentioned article. Income is key and two predominant ways of achieving this income is from real estate (through rents) or the stock market through dividends. Personally I use both and there are definitely advantages and disadvantages of both vehicles of which we will discuss in this article. Nevertheless, irrespective of the vehicle you use, you must be an educated investor if you are going to succeed. A famous line Robert Kiyosaki uses in his books is " There is no such thing as a risky investment but only a risky investor" This is so true but it is very much forgotten in today's investment world as many want instant gratification. Unfortunately you need to pay your dues (or earn your stripes) in both vehicles before you become a professional. Let's discuss.

Seeking Alpha has taught me two things. To be authentic and to teach people how to make consistent income in the markets. Before we switch to stocks, let's talk about real estate investments. I own both residential and commercial real estate. I use debt to finance them and use the rents to lower the outstanding debt. This is definitely one advantage of real estate over dividend paying stocks. If your financials line up, banks will bend over backwards to lend you the money for real estate. They won't however for investing in stocks. In saying this, if you can get your brokerage account to $110,000 or more, you can avail of "portfolio margin" from your stock broker which entitles you to far more leverage (margin) than a normal margin account. Nevertheless i am an advocate for using "no margin" in your account unless you are a seasoned investor. Excessive margin use usually wipes out portfolios. Moreover the key difference here is that in real estate, the bank usually only gets its money back when the asset is sold or the debt is paid off. However when you use margin in a brokerage account, you could easily be subjected to a margin call which usually happens at a moment's notice - ouch!

I actually prefer my commercial real estate holdings to my residential as an investment. Why? Because I never get a phone-call from a tenant. These industrial buildings are blank canvasses which means there is nothing that can go wrong. Residential lettings on the other hand are more complicated especially if you supply the white goods and furniture which is something you have to do if you want to compete against other landlords. 10 years ago, I thought cash flow real estate was going to be my investing future but not anymore. I feel there is far more value in dividend growth investing for a number of reasons which we will list now.

Firstly let's talk about income. Let's take one of my favorite dividend growth stocks - Chevron Corporation (NYSE:CVX). Let's say that we bought $50,000 worth of stock back in 2005 (10 years ago). (See 10 year chart below)

Now the chart shows that this company enjoyed a capital gain of 106% over the last 10 years. This means that if the company didn't pay dividends, our investment would have turned into just over $100,000 in 10 years. However this company also pays a fantastic dividend of almost 4% and the company has been raising this dividend for the last 27 years. When we include reinvested quarterly dividends into our calculation, we end up with an annualized 10 year return of 11.39% which makes a huge difference to our dollar amount gain. Suffice to say that our original $50,000 investment now turns into $146,000 over 10 years. On a side note, Chevron announces earnings this Friday and personally I would use any weakness in the stock price to accumulate more shares. This company has suffered like all oil majors in the last 9 months. However oil prices have rebounded sharply recently but Chevron hasn't enjoyed the gains crude has made over the last 30-45 days. However the chart shown below illustrates that there is a tight correlation between crude oil prices and Chevron's stock price. Therefore if oil keeps rallying, I believe that sooner rather than later, Chevron will make it back to its old highs of $135+.

Back to the article in hand. Chevron's example begs the question. Would you have turned a $50,000 investment in real estate into $146,000 (in combined income) in 10 years? Of course it would have been possible but let's outline some of the headwinds when trying to earn income through the hands-on real estate route compared to the dividend growth stock route.

  1. With property, you have to consider void periods which will result in no income. On the contrary our stocks not only pay us every quarter but they raise their dividends every year on time every time
  2. Money loves speed so liquidity has to be a huge positive with stock market investing. One can sell their holdings in a heartbeat. Compare this to real estate (Property fees, utility bills, solicitor fees and also trying to find a buyer if you want to sell) in my opinion all definitely delay the compounding of your money
  3. The time spent in managing a large property portfolio can be extortionate. If you don't want to do it yourself, you are going to have to hire someone at a cost to do it for you.
  4. Obviously the goal here is income. Who do you trust more to pay you. A Chevron, a Coca-Cola (NYSE:KO) or your tenants? I would pick a proven multi-national every time over a human being or business where usually we (landlords) don't have a clue about their financials.

Point 4 is the most important one for me. The ability to dissect a company's fundamentals, observe what the company did in the past and obviously take note of its earnings. This is why a Real Estate Investment Trust - REIT maybe better for some hands-on real investors. Why?

  1. Its more passive - The fund does the work for you
  2. Dividend payments from the funds will replace your rents
  3. When you become experienced in fundamental analysis, you can separate the good REIT's from the bad

One REIT I like is Realty Income Corp (NYSE:O). It pays a nice dividend yield of 4.64% and it pays it monthly. Fundamentals look good as the fund locks in tenants into long term contracts. This fund also has an excellent history of increased dividend payments and these dividends in the current environment look very safe to me as occupancy levels have exceeded 98% since 1980. Free cash levels are good at 34 million as the chart shows below and the fund is well diversified with over 4,000 properties let (Pharmacies, shops, etc.) across 49 states. I did the same calculation as our 10 year Chevron calculation above and extrapolated that $50,000 invested into Realty income 10 years ago would have turned into $180,000 giving the fund an annualized growth rate of 13.68%. Pretty impressive in my view.

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To sum up, I hope this article illustrates that there is a multitude of options available for the investor in the dividend growth arena, be it stocks or funds. Make the leap, do your fundamental research on sites such as this one and over the long term, you won't be disappointed.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.