Dividend Stocks vs. Rental Properties

Sizing up a property requires skills similar to those required to size up a stock.

Sizing up a property requires skills similar to those required to size up a stock.

Many types of investments can provide you with income, but some take more work than others. For example, if you compare dividend stocks with real estate that you rent out to tenants, you'll see that deciding between the two is a matter of looking at how much you want to monitor your investments. Either one can produce profits, so you have to decide which type you want to dedicate time to.

Dividend Stock Advantages

Dividend stocks pay you monthly or quarterly. The company that issues the dividend stock shares profits with you on a regular basis. In other words, the company does all the work and you get paid just for being a shareholder. You are paid according to the number of shares you own. For example, if a company pays a dividend of 25 cents a share, and you own 1,000 shares, you receive $250. That's it. You don't have to do anything else to receive your dividend.

Dividend Stock Disadvantages

Payment of a dividend is not guaranteed. If a company doesn't have enough cash, it may not pay a dividend. Also, a company can lower the dividend amount any time it wants. If this happens, your stock could lose value because investors won't find it attractive. This means you could lose not only your dividend, but your original investment as well. You can't buy any kind of insurance that guarantees the value of your investment in dividend stocks.

Rental Property Advantages

When you buy real estate, you get the advantage of leverage, which means you make a down payment but you get the income from the entire property. For example, suppose you make a down payment of $20,000 for a $100,000 property. You receive any appreciation, so if the property goes up $10,000 in value and you sell it, you can make $10,000 on your original $20,000 investment. You also get all the rent tenants pay. You can write off part of the value of the property each year, because the Internal Revenue Service assumes it is losing value. You can also write off maintenance costs and repair expenses.

Rental Property Disadvantages

You must pay property taxes each year on rental property. You also must have enough cash on hand to cover maintenance and repair costs, as well as mortgage payments -- including months when you have no tenants and therefore no income from rent. You must advertise for tenants and screen them, and collect the rent from them each month. You must be prepared to spend time checking on your property, managing it (or hiring someone to manage it) and arranging to take care of landscaping.

About the Author

Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.

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