Not all companies should be counted on for stable and growing profitability through dividends. It’s very important to take into account the sector in which the companyÂ and its various businesses operate.
There are cyclical companies (airlines, chemists, etc.) that, during the good years of the business cycle, deliver large dividends, but fail to do so when business isn’t booming. It is quite probable that these types of companies will reduce the dividends paid outÂ at some point in the future. This is not to say that these companies are bad investments, but you shouldn’t thinkÂ of â€‹â€‹holding them indefinitely to collect dividends that will increase with time above inflation. Some of these cyclical companies are very good and highly recommended for many investment strategies, but are not suitable for those looking to collect an income.
Real estate is similar. Not all investments are suitable methods to collect a stable income.
The main advantages of stock dividends in relation to real estate rentals are:
1.Dividends paid out by listed companies in the past are known, reliable and public data. When an investor studies investing in a company he knows exactly the dividends that the company has distributed in the past and the profits it has obtained. There is nothing similar in the real estate market, so it is impossible to know the rents that have actually been paid and charged for each property in the past. Only the owners and tenants of each property know the actual data of the operations in which they have intervened. And pretending to know the rents that were actually paid 3, 5 or 10 years ago is still much more difficult.
2.Dividends depend on the profits that the company has, namely the earnings per share (EPS). The rents of the dwellings depend on the average salary of the population. Historically, the profits of companies grow at rates much higher than the average salary, so that dividends also grow at rates higher than long-term rentals. Growth in both cases is in geometric progression, so differences that may seem small from one year to another become very important in the long run. The price of housing can be temporarily disconnected from rising wages and grow at faster rates due to lower interest rates, lengthening the term of mortgages, etc. In addition, the people who usually resort to rent are usually those with lower purchasing power, so their salaries normally go up less than the average.
3. Reliability. There are many companies that have not stopped paying outÂ their annual dividends in the last 50, 100 or even more than 200 years. In addition, the dividends of these solid and stable companies grow in the long run at rates above inflation, wages and rents. The vast majority of real estate have more or less long periods of unemployment every few years, sometimes even every few months. During these periods of unemployment, the income is no longer collected but expenses and taxes must continue to be paid.
4.Collecting a dividend can not be simpler. The bank or securities company in which the shares are deposited is responsible for collecting and entering the amount into the customer’s current account. The bank handles everything automatically. Renting a property requires time and expertise. You have to negotiateÂ the rental amount with the tenants, study them to avoid problems of defaults, damages, etc., manage the problems that arise between the tenant and the landlord take care of repairs, taxes, etc.
5.Business activity, in the long run, is expanding. People increasingly need and want more products and services. On the other hand, there are very few people who want to live permanently. Renting is a temporary solution to which you put an end as soon as you can. That is why the rental market is relatively small and practically nobody wants to be in it. That a large number of people decide to invest in housing for rent later does not mean that the number of people willing to pay rent will increase in the same proportion.
6. The maintenance costs of a portfolio of shares are minimal. The sum of all of them (custody and collection of dividends) is a negligible percentage of the dividends charged. The maintenance costs of any property (community fees and levies) are high and reduce the profitability obtained by renting by a significant percentage.
Dont get me wrong, if you are a great developer, you can make a lot of money in real estate, but for long term steady income, nothing beats dividends.