Did you know that owning dividend stocks and being a landlord share a lot in common?
You can get income today in the form of dividends or rent, and, if all goes well, that income will keep recurring into the future. Hopefully, the value of your original investment, whether it’s a property or a stock portfolio, will go up over time.
In real estate, people generally invest to generate rental income today and ideally more income over time. But with stocks, many investors focus on today’s price while ignoring the long-term income potential of dividend stocks. They're taught to buy low and sell high but often forget about the income opportunity between those two points.
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 is expected to generate. In the stock market, it's called current yield—which is how much annual income the stock produces relative to its current price.
A landlord would also ask, "Who will be living in my building?" You would want to check your tenants' credit history, debt, present earnings, and so on. Quality tenants tend to pay the rent on time and will hopefully continue to do so even when the rent rises.
Dividend stock investors should do this too. While trying to buy low and sell high they need to thoroughly investigate the company’s willingness and ability to pay dividends. Quality companies often have a track record of consistently paying dividends and increasing dividends over time.
Stock investors all too often obsess over the value of their holdings, constantly checking prices on their phones. This is shortsighted. As a dividend investor, the next time you receive a statement from your financial advisor, look beyond the first page summary and ask, "Has my account produced any income, aside from a possible increase in my principal value?"
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. It wouldn't be long before you'd say, "Stop calling me!" and hang up. At that point, you might care more about whether rent checks are arriving on a regular basis.
For dividend stocks, price return plus any income received equals total return. That possible income provides flexibility. You can spend dividend income. You can also reinvest it. And though dividends may seem small, they could become very powerful over time.
Reinvesting income will lead to compounding. Conceivably, in addition to receiving income from a stock—much like rent—if you bought more shares, you could receive even more income from the company.
If you were a landlord, this would be similar to taking money you'd earned from rental income and buying more units, which would likely increase your total rental income.
We believe owning a dividend stock portfolio has a lot of advantages over being a landlord—especially for those looking toward their retirement years. When dividends are reinvested, the value of the investment compounds over time. There are no mortgage payments, no anxious tenants calling at all hours of the day, no maintenance hassles. With a stock portfolio, assets can be sold in seconds, not months.
Miller/Howard Investments has managed dividend-focused portfolios for nearly three decades. We firmly believe that a portfolio targeting financially strong dividend-paying stocks is a key to building long-term sustainable wealth and essential to maintaining wealth for investors who need to spend income.