Are Dividend-Paying Stocks Better Than Tenants?
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When talking about a stock portfolio of companies that pay and grow dividends, we often use an income generating real estate analogy, emphasizing that it's all about cash flow.
Are Dividend-Paying Stocks Better Than Tenants?

Dividends: An Old Idea for a New Reality

Are dividend-paying stocks better than tenants?

When talking about a stock portfolio of companies that pay and grow dividends, we at Miller/Howard Investments often use an income generating real estate analogy, emphasizing that it's all about cash flow. Everyone seems to understand the idea of rental property. You get income today. Hopefully, more income tomorrow—and hopefully a more valuable property in the future. A stock portfolio can be like this too.

What would an investor look for when buying a 25-unit apartment complex?

First, you want good location with potential for the location to become even better in the future. This would increase the value of the property investment and in the case of a stock portfolio, this would equate to appreciation potential.

Second, you want financially sound "tenants" who have the ability to pay their rent on time and in full and have the capacity to pay increasing rents over time.

We compare these rents to the dividends paid by your stock portfolio.

Third, and most important, you want to own something that's going to pay its own bills and give you a cash return on your investment right away. You would never rent an apartment to a tenant who couldn't pay now, but promise to pay you sometime in the future. In other words, you want your investment to be cash flow positive.

    To recap:
  • Good location
  • Financially sound tenants
  • Cash flow positive

Why do you hold an income property?

One reason is that you have a reasonable expectation that rents will rise as leases become due and if you hold steady, your property value should slowly appreciate over time as a result of the rising cash flow. The bars show how $300,000 in rental income the first year could theoretically continue to grow at 5% a year. In year ten, your income would have risen 55%. In this case, your value would also go up 55% during the period, since rental properties are commonly valued as a multiple of their rent. So as rents go up, all things being equal, so should the value of the property.

This area represents the value of your investment. For example, the $5 million paid for the apartment complex, increasing at the same 5% per year as the income increases.

This next area represents a fluctuating property value, as we all know property values can and do change. What is important to note is that whether the value of the property is up or down, the owner still collects the rents, which are cash flow positive.

Unlike investor behavior with a stock portfolio, real estate owners don't check the prices every day, or even every month because they are not intending to sell the property as long as it continues to generate the anticipated cash flow.

You take a long view, knowing that you've made an investment, not a trade. The same concept holds true for an income generating portfolio of dividend growth companies. Stocks can be held for a lifetime if they continue to fulfill their promise of income today, increasing income tomorrow, and over time, growth in the underlying principal.

Why should an investment in a portfolio be any different?

It isn't really, if, you have a portfolio of financially strong companies that pay and grow dividends. Not unlike the real estate analogy with its tenants and rental income. The companies are monitored to ensure they can pay increasing dividends on a regular basis. In other words, if investors focus on income generation, the stock prices will take care of themselves. You give your portfolio the time it needs to generate current cash flow and rising income that can help pay expenses and / or reinvest in more stocks, which can generate even more income. This is the beauty of compounding.

These are some of the many benefits to owning a dividend stock portfolio, and unlike our rental property analogy, a portfolio of dividend paying companies has no mortgage payment, no tenants to bother you at all hours of the day and night, and no roof to fix. And with a stock portfolio, if you need to make a sale it can be done in minutes, not months.

Miller/Howard Investments has been managing dividend-focused portfolios for nearly two decades. We firmly believe that a portfolio targeting financial strong dividend-paying stocks is the key to building long-term sustainable wealth and essential to maintaining wealth for investors who need to spend income.

All investments carry a certain degree of risk, including the possible loss of principal. Dividend yield is one component of performance and should not be the only consideration for investment.

The companies shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell their securities.

Investments are not FDIC insured, may lose value, and are not bank guaranteed.

© 2018 Miller/Howard Investments.

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns, past, hypothetical or otherwise, are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance and investment time horizon.

Past performance does not guarantee future results.

DISCLOSURE

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns, past, hypothetical or otherwise, are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance and investment time horizon.

Past performance does not guarantee future results.