Real Estate vs Dividends – What is better for Retirement Income?
These days, everyone is working harder than ever to pursue that dream of retirement. Wither retirement comes early or later, we all are striving and preparing for it. However, everyone goes about preparing in different ways. Some find themselves building a diverse portfolio of dividend or growth stocks to provide passive income for years to come. Others take the more hands off approach and invest into low cost S&P500 funds and just let it ride. Real estate is very popular, especially among the baby boomer generation. Though not optimal, you could also just have a big stock pile of cash you can live off of to it retirement. While they all end up with the same result of getting us to that magic place away from our full time jobs called retirement, what method performs best once we actually get there? What is better to use as retirement income?
For this example, we will compare income from dividend stocks versus real estate. For argument sake, we are going to assume the same income for each. So for example sake, both methods will receive the same gross income and all basic personal expenses will be equal.
So how does each method generate income? I would hope if you follow this blog, you are aware of or follow dividend investing in some way. For those of you who don’t know, a well established and diverse dividend portfolio is a list of stocks or companies you own shares in. Depending on the company, they pay dividends either every month, quarter, or year. For this example, all we care about is that we are using the dividends received as income in our retirement. For real estate to generate regular income, we will assume the retiree is renting out their properties. So which is more efficient?
First, the source of income from rental properties is tied directly into the tenants. If one moves out or stops paying rent, you immediately lose all cash flow. This could take weeks or even months to replace. Unfortunately, this can be a common occurrence in rental properties.
Secondly, you are a landlord to your tenants. So this is not passive income as you will always be involved somehow. One way is by being in charge of all of the maintenance and repairs. When issues arise, this can get very expensive in a hurry. It also takes up a lot of time, taking away from the enjoyment of retirement. Since it is probably in a contract, you can’t have a long delay between projects or repairs either. They must get done promptly and sometimes this forces your hand to spend even more of your retirement income.
If you retire early, this may not be such a bad thing. While young and able, you may be able to make some repairs by yourself if you are handy which saves having to pay for expensive labor. But as you get older and your body starts slowing down, this is no longer optimal or efficient. It is important to look after your physical and mental health. You will either have to contract out the work or hire a property management company to look over and maintain your properties for you. Either way, your retirement income is slowly dwindling with each issue that arises or by having to pay the management company to deal with it.
We did say regular expenses are the same for this example. But for the real estate owners, they have extra expenses added on. This can be in the form of any land/ property taxes, management fees, insurance, etc. on all of their rental units. So even if all properties are completely paid off, you still may need to pay these expenses. Some may be factored in to the tenants rent but isn’t always the case.
Lastly, real estate property is open to all sorts of damage. Damage could be caused by the tenants themselves, weather or natural disasters, pests or rodents, etc.
With dividend stocks, even if the value goes down, they pay. Typically, dividends are rarely cut either and will always increase providing more income. If one company cut’s their dividend, it will at least still produce a little income. If it is cut completely, within minutes, I can take out my investment and re-purpose it into another dividend stock while still collecting from others.
Once the portfolio has been established, there is little to no maintenance to do. Other than making sure no companies cut their dividends. Either way this “labor” is not back breaking manual labor like doing repairs. It can be done by anyone of almost any age, so age that is not a factor.
As far as expenses go. Yes, even passive mutual funds may charge a small yearly fee, but that is usually only a fraction of the expenses that go with real estate. Usually you pay trade fees to accumulate your portfolio of stocks. Once they are yours, there is no other fees associated. You simply sit and collect the truly passive income. Dividends are also taxed at a lower rate. So more money stays in your pockets.
There you have it. While rental properties may be better in the initial wealth accumulation phase of life, dividends are more efficient once you pass that line into retirement. They will save you money on taxes and expenses, give you less stress, easy to maintain, and most importantly, provide you with all of your hard earned time to do whatever you love and want to do in retirement.