Miller/Howard Investments

How Dividend-Paying Stocks Are Like Tenants, Only Better

In real estate, investors ask, "How much income can this building produce?" In our opinion, stock market investors should too.
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Hi. My name is Keith Thompson. I'm a Regional Director at Miller/Howard Investments. Today I'm going to talk about owning dividend stocks—and how, to me, it's a bit like being a landlord.

In real estate, people sometimes invest so they can have rental income TODAY and the possibility for more income TOMORROW. But in the stock market, I've found that many investors focus on PRICE and ignore the long-term potential of dividends. They're taught to buy low and sell high—and they can forget about the INCOME opportunity between those two points. They may believe the price will go higher, or that maybe the company is on the cutting edge of technology. So they wait, and hope to sell the stock for a profit later on.

Using my real estate analogy, this would be like buying a 20-unit apartment building and then keeping it empty of tenants, hoping you could sell it for more than you paid, perhaps 10 years from now—without receiving ANY RENTAL INCOME during those 10 years. That would make no sense!

If you were looking to buy an apartment building, you'd ask, "How much rent or INCOME can this building produce?" In real estate, this is called the capitalization rate—the rate of return on a real estate property based on the income the property's expected to generate. In the stock market, it's called CURRENT YIELD—how much annual income the stock produces relative to its current price.

But the next important question for a landlord might be, "Who will be living in my building?" You want to check into your tenants' credit history, their past and present earnings, how much debt they have, and so on. QUALITY tenants tend to pay your rent ON TIME and will generally continue to do so EVEN WHEN THE RENT RISES.

In my opinion, stock market investors should do this TOO. You may be so focused on buying low and selling high that you don't do a thorough investigation into the credit quality of the stock. Quality companies may have a track record of paying their dividend ON TIME and INCREASING that dividend over time.

Often, investors in the stock market open up their brokerage statement, check the bottom of page 1, and ask, "What's the value of my account?" Or they check the stock price every day on their cell phones, thinking the price should be going up. We believe this behavior may be too narrow. As an investor in dividend stocks, the next time you receive a statement from your broker, have a look at page 2, 3, or 4 as well, and ask, "Has my account produced any INCOME, aside from a possible increase in my principle value?"

Like rent, any income generated by dividends may arrive on a schedule, although not guaranteed, while the actual stock prices bounce up and down. We believe that DIVIDEND INCOME can help investors build wealth in what we hope is a more stable and calculable manner than relying on the underlying STOCK PRICE.

For comparison, imagine, as a landlord, your real estate agent called you every day to tell you if the value of your building had gone up or down. Then imagine that it wouldn't be long before you'd say, "Stop calling me!" and then hang up. At that point, what you may care about more is whether the rent checks are arriving on a regular basis.

For dividend stocks, price plus any income equals total return, and that possible income provides flexibility. You can SPEND any dividend income, or you can REINVEST it. And though dividends may seem small, they could become very powerful over the course of time. REINVESTING income may lead to COMPOUNDING, which Einstein called "the 8th wonder of the world." Conceivably, not only could you receive income from a stock—much like rent—but if you buy more shares, you could be getting even more income from the company if it raises its dividend.

If you were a landlord, this is akin to taking money you'd earned from rental income and buying more units. Now you would likely increase your total rental income.

With dividend-paying stocks, you may benefit from compounding over time, but there is no mortgage payment, no anxious tenants, no leaky roofs to patch up, and your stocks may be sold in seconds, not months.

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