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Real Estate vs Dividends – What is better for Retirement Income?

Dividends vs Real Estate - Best 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?

 

Retirement Income

 

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.

 

save for retirement

 

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.

 

52 Comments

  1. This is a super question. I’m not sure one is better than the other. They’re just different.

    As you point out, dividends are much simpler and the underlying investment is certainly more liquid.

    The premise that assumes the income is the same BEFORE all the other costs associated with real estate are factored in is a little unfair to the real estate side of the argument. But every property situation is going to be a little different, so there’s no point nit picking. Given those conditions, dividends are a lot more appealing.

    I will quibble the point about it not truly being passive income. I can say from experience that it can be extremely passive. We moved from California to Colorado earlier this year, and kept the place back west to rent out. We hired a property management company and they take care of everything. I don’t even know the tenant’s name. Just like a dividend, I get a check once a month and that’s it.

    Now the PM company eats into the income a bit, but it’s worth it. Even after those costs, the rental provides a very nice little income stream. We could have sold the house and invested that equity into dividends or whatever, but I liked the diversity of the income streams and the uncorrelated asset allocation that physical real estate provides.
    catfishwizard recently posted…Why I Don’t Give a Crap About the Dividend Payout RatioMy Profile

    1. Diversifying income streams is a very smart idea. I’m not saying that they won’t get the job done. I agree they are just different and it really comes down to the person who owns the asset. However, in a perfect vacuum argument, income and costs being the same and no external expenses. The only certainty is dividends are still taxed at a lower rate giving them an edge. And it depends on what you can write off on your taxes on the rentals to make up for that. Could come out ahead, who knows? Makes for a fun argument though. I appreciate your comment.

  2. Hi DD,

    For me, dividend investing is far better than real estate investments. There are many reasons for it, some of them you already mentioned but the biggest one is stress.

    I didn’t quit my job out of stress to be stressed about rental properties. Dividend investing is essentially stress free for me and I enjoy it.

    Besides, I get ample real estate exposure through REITs which is preferred way to investing in real estate.

    Thanks
    Mr. ATM
    Mr.ATM recently posted…A Lesson From History: Market Does Not Go Down In A Straight LineMy Profile

    1. You got that right. REITs are a great way to get real estate exposure while being a dividend investor. There is clearly money in real estate hence the high yields, etc. But that isn’t the topic of this post. And I agree fully, dividends are way less stressful. And I enjoy doing the research and actually feel less stressed when reviewing my portfolio. Thanks for stopping by and commenting!

    1. Absolutely! That is an important part of DGI. But research is way less strenuous and I actually find it enjoyable. So I don’t mind doing it at all. I agree, dividends and investing in the market is the way to go!

  3. A timely post since I am looking into single family home rentals. Like all investments, each has its pros and cons. Rental properties also have tax advantages to consider plus with a rental property you can usually hire a property management company to manage the day-to-day and repairs for you so you don’t have to be bothered. This makes the investment more passive like a dividend stock (of course it also comes at a price (usually about 8-10% of rent)). It’s also nice to have some diversification into a hard real estate asset.

    1. Sounds very timely indeed. I agree there is a lot of value in real estate, especially for generating income. In wealth accumulation, it will probably get you there faster than dividends will. Property management taking over is great so you don’t have to worry about anything. But you are still technically liable for everything so you need to keep an eye out. A lot of people are very successful with real estate. I wouldn’t mind myself having a rental property for diversification purposes and extra income. But my main focus is still on dividends. Thanks for stopping by and commenting!

  4. This is a very complex question. Probably the short answer is that it worth having both as a diversified income stream. What can make real estate investment great, is the leverage if you take mortgage (especially with such low interest rates). We just bought our first rental and it will be interesting to see how it works out.
    Roadrunner recently posted…Start Up Your Financial EngineMy Profile

    1. Diversification is important for sure. And rental properties can be very lucrative. But that isn’t necessarily the argument here. Having to pay interest at all puts it down a peg against dividends for this specific example. And if dividend investors want exposure to real estate, that is where REITs come into play. Some like O, pay monthly too for consistent income. As always, I appreciate your comments.

  5. Dividend is definitely more passive in nature. Just do some reading and click some buttons on your computer and then you’re done. Rentals can be more passive if you’re willing to pay a management company to take care of everything for you. Millennials I’ve noticed are not getting into rental properties as much at least not right now. Maybe waiting to accumulate the capital for a down payment.
    SMM recently posted…Simple Fund Comparison – SCHD VS VIGMy Profile

    1. That is a good point. Millennials are are doing a lot of things differently than the older generations. It is causing a huge shake up in certain sectors of the market/ different markets. A lot of people I know are saving up for a big down payment on a house instead of getting a starter house. But eventually, everyone retires and will need to be prepared. I prefer dividends myself when that time comes. Just depends on the individual person. Thanks for your comment!

  6. This is a great post on much debated topic. I lean towards dividends as the better (though I would not mind having both, but that’s not possible right now, especially in my location). Not everyone has the cash on hand to invest in real estate (such as myself), but almost anyone who can save can invest in dividend stocks that can build great value over the decades for retirement. The other option is REIT’s (which already make up a significant portion of my portfolio.)
    My Dividend Dynasty recently posted…3 Simple Ways I’m Saving on My Electric BillMy Profile

    1. I know what you mean. Real estate gets expensive. And you are in NY too aren’t you? I can’t imagine how expensive that must be for even the smallest property. REITs are a great way to get some exposure to real estate while being a dividend investor. Thanks for your comment.

  7. Like you, I prefer the more passive nature of dividend stocks, and like others have posted, I have used REITs to allocate a portion of my portfolio to real estate.

    That said, I would consider owning rental real estate if I could purchase an attractive property at a big discount to today’s values whenever the market turns. I think if you purchase real estate right you can generate a cash yield that you just can’t get from most dividend stocks. When dividend yields on stocks start getting well into two figures, it’s often a sign the dividend is going to be cut and/or the company is heading towards some major financial problems. If you can purchase a nice property in a good location at a discounted price you can set yourself up for a high cash yield and a great chance at significant price appreciation over the long term (with the costs of carry you do mention).

    Problem is, there aren’t too many pieces of real estate around the country right now that fit those criteria, so in the meantime I’ll stick with you and focus on my dividend stocks!
    Retiring On My Terms recently posted…Geographic Arbitrage: The Least Expensive States for RetirementMy Profile

    1. I would also love to own a rental property for the cash flow if the opportunity presented itself. No reason to not have both, but the value is so hard to find these days, your right. Now if I was able to get something inexpensive during the last crash, that would have been ideal. Guess we just need to wait and see what happens. Keep a little cash free if the opportunity presents itself again right?

  8. As catfish said above, it’s not really which is better as they both offer benefits and are just different. It all comes down to how passive one wants to be. Clearly, dividend investing is a lot more hands off than real estate which is what drew me towards DGI in the first place. I’m not against real estate as several of our fellow peers use both DGI and real estate to build their wealth, I just wanted something as ‘passive’ as possible.
    DivHut recently posted…How To Avoid Over-TradingMy Profile

    1. I agree, keeping things as passive as possible is the way to go. We all want that. There are tons of other ways that aren’t DGI or real estate that one could use for potential passive income. Some people like being hands on or it gives them something to do in retirement so they aren’t bored, so real estate may be more suited for those individuals. As long as people are making active strides to set themselves up and do the research before hand, it will turn out well in the long run. I appreciate your comment!

  9. Both are interesting ways to gain “passive” income. To me, it depends a lot where your passion and skills are.

    In the long run, I would like to have a combo of rental, dgi and option income, backed by an index portfolio.

    1. Diversification is key for sure. I am not really a hands on person so I don’t think real estate is totally for me. Even though I wouldn’t mind dipping my toe into the water so to speak. Index portfolios are great for 401k and employer matches or even IRAs. Low expense ratio Vanguard S&P500 fund does the trick. Options are a great way to supplement income, especially dividends. Just is a little more hands on as well and there is a little more knowledge or skill involved in options than standard DGI. Just trying to keep it as passive as possible right? They are all good options if done correctly.

  10. I prefer both rather than either or. They each have their pros and cons. For example, to get the full benefit of dividend investing, you don’t get to leverage into your stocks (unless you buy on margin) although you do get the power of compound growth. With real estate, I can get the benefit of the rental income without coming up with 100% of the purchase price by leveraging into that property. Then, I’ll have the tenants pay for the property over time and then once it’s paid off, I get the benefit of the rent without any going towards the mortgage company.

    But, I prefer both and I do both. I’m slowly building up my dividend portfolio overtime, and I invest in real estate. I bought a house last year to live in and has since temporarily moved out of the country! Yet, the house just rented and a property management company is taking care of everything. There are higher expenses with real estate, but there will eventually come a point where the profits I am getting from the rental income will allow the house to take care of itself.

    But it’s always a good thing have income coming in from diversified sources, and so I prefer both approaches. Great question and great post.
    Dividend Portfolio recently posted…How I Tackle DebtMy Profile

    1. Thanks DP, I appreciated your comments. Both are an excellent source of income for sure. And no one said it has to be one or the other. You are right that you don’t have to own the property outright and just a down payment will do to collect the income. You can leverage equity to buy more property as well. But this really all happens in the accumulation phase of wealth creation. I was more so referring to the after the fact, retirement stage when everything is already paid off or built up to the levels you want/ need it to be. Having both methods of income in a portfolio is a great idea though. As always, I appreciate your comment.

  11. Thanks for a great post! It shows several aspects of renting properties I did not think about previously. And it is true that it makes sense to rent properties earlier on your way to FI. Usually, you take a mortgage for buying an apartment and the rent should ideally cover it fully. In this case, you start getting steady income earlier. You would need much more time to reach the same monthly income by investing to dividend paying companies. I think it is not wise to borrow money from a bank and pay high interest rates to invest to stocks for dividend income.

    1. Thanks! Glad you enjoyed the post. Debt and tolerance is a whole other topic of conversation. I have seen a few DGI community members who have leveraged debt in order to build up their portfolios. If used properly, it can be a great tool. As long as you can keep your returns/ yield higher than the interest rate to pay it off. Then once that is paid off, your portfolio is larger and has compounded since when you purchased it. Just adds to the time in the market I guess. But I agree, I don’t like taking on more debt and try to avoid it if I can. Thanks for stopping by. Hope to see you around the site more often.

  12. DD –

    LOve the comments you are receiving here.

    I talked to someone about this a few months ago. To me, I feel it all comes down to personal feel/level. I feel better/capable of managing my portfolio, evaluating undervalued fundamentally sound companies, investing and going forward. Some may love the rental rush, though! Thoughts?

    -Lanny
    Dividend Diplomats recently posted…Bert’s Recent Buy – Cardinal Health (CAH)My Profile

    1. Thanks Lanny. I agree. This post has been getting a lot of attention and very good feedback on different points of view. I’m the same way and I prefer to keep track of my portfolio. It is as close to passive as I can get. But I also am not very good with real estate and fixing bigger things on my own. So dividends suit my personality. It could really go either way I guess, but I still feel like dividends comes out ahead. As always, thanks for your comment!

  13. Great idea for a post, DD! I prefer the dividend income over real estate income. No RE income for me at this point, but I’d be open to it if the right situation presented itself. I’d most likely seek out property management, as managing the property myself would detract from my idea of ‘passive’ income. As other commenters mention, if you can use leverage to secure the RE and get into a good situation, you can generate a large amount of income with a lot less money than the dividend portfolio would take to generate the same amount.
    Engineering Dividends recently posted…Portfolio Thoughts (August 2017)My Profile

    1. Thanks for your comment. I wholeheartedly agree. Dividend investing is my focus now but would be open to the idea of a rental if the opportunity was there. Keeping it passive as well with the property management company if possible.

      You can probably generate a lot more income at a faster rate with RE, yes. However, that isn’t really the argument at hand in this post so I tried to take out those factors. You can do a lot leveraging real estate though. It is an interesting topic/ debate for sure.

  14. Great Q&A! Choosing between the two would be really hard. I like both precisely because of the differences, and also because having both increases diversification. A few years ago we bought a new house and turned our previous house into a rental. To do so, we closed out some of our investment accounts, essentially diversifying.
    FerdiS recently posted…Using Options To Boost Dividend IncomeMy Profile

    1. I do love the diversification in itself having both. REIT can help to increase real estate exposure in a portfolio, but it is also tied to the market more and it’s mood swings. There really isn’t a bad way to go as long as you are smart about it. That being said, I still am a big fan of the dividends. Thanks for stopping by and commenting!

  15. Great post, Dividend Daze! You bring up some great points about why I’d rather be a dividend investor over a real estate investor. Personally, I think it’s an individual thing that depends on the person. Some people are inclined to work more physically and have an interest in decorating a home. They also might need to see something physical in terms of owning an asset. I think those types would be better off in real estate. On the other hand, for someone like me who is not skilled or interested in decorating a home, it’s probably better to focus on dividend investing. I’ve thought about this debate before and the only advantage I can give real estate is the leverage a mortgage provides. I much prefer dividend investing because I’m more of an introvert and would not enjoy being a landlord. I also like to keep my expenses as predictable as possible. I have no car or mortgage right now so it is pretty easy to plan for. Thanks for sharing the great post! It’s a really interesting topic/debate. Have a great week!
    Graham @ Reverse the Crush recently posted…Dividend Income Business Update #3 — August 2017My Profile

    1. I am really glad you like it Graham! I’m the same way, don’t really have the skills necessary to do it myself when it comes to real estate. So that would make it more costly. Also don’t have the contacts in that industry that may be necessary to run a successful operation. Dividends are easily manageable alone in way less time. I really haven’t though about someone being a visual person and actually need to see the asset to appreciate it’s value. That is a good point. I can see a level of security, and predictability that comes with dividends knowing what will happen each month if everything stays the same. Easier to budget for it moving forward. As always, thanks for your comments!

    1. That is true, which is why I took that part out of the equation to evaluate the outcomes for both. With more assumptions, that would change the whole topic. But you are right, this is merely an exercise/ discussion. In practical real life terms, it would be much more difficult to generate that much dividend income. It would take a lot more time as well to build up to it. Great point.

  16. I’d go with Real Estate, why? Because every physical real estate investment you make puts you in charge as CEO. As CEO, you are able to make improvements, cut costs (refinance your mortgage now that rates are back down post now that Trump is disappointing on some of his main promises), raise rents, find better tenants, and market accordingly.
    Kylian Gibbs recently posted…How to Get the Best Mortgage RateMy Profile

    1. Nice, think you are one of the first ones to charge forward on a full real estate stance. That is true, treat your investments like a business. They are there to make money so do everything accordingly you can to make sure to maximize the profits. While I can agree with that, it does still add a lot more stress and diligence taking care of those things. Unless you are really into it, then it may turn out to be a benefit instead. Very good points. Thanks for stopping by and commenting.

  17. I am sorry I am just now getting to this post, which is clearly a little late for the discussion portion, but I have to say that I completely disagree with most of the article and many of the comments. I’ll add a smiley 🙂 (…not to come across too harshly!) but if I’m honest I really do disagree.

    I would encourage anyone who thinks Dividend Investing is a ‘better’ way to retirement income to come on over to my blog and see my story. I’ve been thankfully doing dividend investing seriously for about 8 years and real estate investing for about 5 years now and I can tell you that there really is no contest. Both are great, but one is clearly better than the other. But again, see my story to see a different perspective on this debate, where I share all details, the good and the bad. Thanks for sharing Daze! 🙂
    Dan recently posted…Passive Income Report: August 2017 (Record x3!)My Profile

    1. I was waiting for your comment Dan! Since I know you do partake in both dividend and real estate, you bring in some personal experience. Never too late to comment. I just got back from vacation anyway, so I’m trying to catch up on all the replys.

      Curious of your phrase “better way TO retirement.” That changes the dynamic and meaning of the post entirely. This is “better DURING retirement.” But either way, both sides show merit and can be used successfully to accomplish ones goals. Nice plug for your site too in there haha. Thanks for the comment.

  18. Nice comparison DD. There is some great info in the book Irrational Exuberance which indicates that in the US and parts of Europe, over the very long term house prices have outpaced inflation by scarcely more than 1%. So the real estate investor is really relying on net rental income for their return. As you made clear, there are tons of circumstances where the rental income may cease, be reduced or consumed by maintenance/fees etc. That’s why I prefer equities to real estate – although I still believe in owning your own home (mortgage free) if you can.

    1. Interesting, I have not read that book. I’ll have to look into it. True, the the income from real estate won’t come from the price alone. It can take weeks or months to sell a house depending on the housing market, location, and other factors. And with extra fees on that, the price alone won’t generate steady income let alone added stress if nothing is coming in to pay for expenses. Owning your own home does help to cut down expenses though in retirement. It is a great goal to achieve while trying to build wealth for the future. Thanks for the comment. Hope to see you around the site more often.

    1. That is true. They accomplish the same goal but are kind of coming from two different worlds. Research is key when knowing what to invest in. Thanks for your comment.

  19. If you do your homework well, the risks and amount of work to be done with Real Estate can be quite limited (think hiring a management company). In certain countries, like ours, there are also major tax implications between the two investment options. Real Estate is actually a more preferable option tax wise. Ultimately you are right, both come with risks and they could potentially be more painful with Real Estate. That being said, both are great ways to use for cash-flow and for becoming FI. That is also why we like (and have) both!
    Team CF recently posted…August 2017 Dividend UpdateMy Profile

    1. Both ways are excellent if used properly. I am not too familiar with the tax codes of other countries but I’m sure it can be leveraged nicely if someone is knowledgeable of it. That is the best thing about FI, there is no right or wrong way to accomplish it. It is smart having both and diversifying.

  20. OP, simple answer to the question is ‘past performance is not an indicator of future results’. So with that in mind & looking at all of the companies listed on Wall st including the bag of ETF’s (forget single individual companies), just the S&P 500 (SPY).

    An investor has certain tastes, what makes them comfortable, can they be landlords, even invest in the stock market – while the majority will do the CD’s & HISA. Kiss principle is not such a bad thing.

    Giving a simple investment model, it could be 50/50 investment with 50% purchasing a positive cash-flow multi-family income property together with the other 50% in one single investment in the S&P 500. An example such as the largest ETF symbol ‘SPY’ and why not just that in your 401K retirement fund?

    Long term that should do it, it’s a balance

    Disclaimer: we are 70 years of age that made most all of our money in income property over a 30 year stretch from rooming houses, multi-family to fix & flip. Investing in the stock market picking the ‘hot topic’ flavor of the day or year is a crap shoot.

    1. Thanks for stopping by and commenting. Very good info. That is why I focus on the dividends because usually they aren’t the “hot topic” since no one knows what will happen with those. Certain stocks are slightly more predictable so you can build a plan around it. That being said, I would love getting into real estate. It is great for building wealth and diversifying. Which is why you wouldn’t just put all your eggs in one basket so to speak. You don’t just want one stock/ ETF/ or property to be the entire source of your income. It could work yes, but it isn’t recommended. Have to make a plan and be smart about it.

  21. Excellent article. I’ve been debating this issue now too. I’m not looking to buy any real estate in the near term, but the increased cash flow from some rental properties is appealing. I could maybe even rent it out using Airbnb. The tax benefits of owning property would be nice. It is also much easier to use leverage (mortgage) to buy real estate than dividend stocks. However, I’m very busy with work (which pays much better than a small real estate investment would) and would need to hire a management company to do the legwork. There goes some of the profit as well.

    Bigger Pockets has useful resources, forums, as well as an entertaining podcast dedicated to real estate. Might want to check it out if you haven’t already.

    Scott

    1. Thanks Scott. I’ll have to look into that. I was thinking the same thing, don’t plan to buy any real estate in the near term but would still love to some day. The larger potential cash flow to build wealth sounds very appealing.

  22. Interesting article! I think it is very essential to make plans for after retirement to live a better life. Thank you for sharing such a nice information with the readers which can let readers know about real estate terms pros and cons for retirement plan.
    Dream Retirement recently posted…Your PurposeMy Profile

    1. I agree. Everyone just think about getting to retirement and not as much about what happens when you get there. Thanks for stopping by and commenting. Hope to see you around the site more often.

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