The Differences In Feeling Rich Between Stocks And Real Estate

I was recently talking with someone from the Columbia, MO area that had built up a net worth of $2,000,000 across fourteen properties that generated for him an income of nearly $200,000 per year, which works out to over $16,000 per month. He occasionally reads the site here, but has found that dividend investing through common stocks doesn’t fit his personality too well because the amount of income generated is way too low for his liking. I get it—if someone has $100,000 at their disposal, they may want more than $3,000 in introductory income. With a $2,000,000 portfolio that consisted of stocks like Exxon, Coca-Cola, Colgate-Palmolive, Johnson & Johnson, and Procter & Gamble, you may only have a 3.0% yield compared to the market value of your stocks. That works out to $60,000 per year, or $5,000 per month. Making $5,000 per month certainly doesn’t feel as rich as making $16,000 per month.

But when you have a collection of common stocks, you gain something that a real estate investor does not—a dividend growth in the neighborhood of 8% or so per year. If someone hits retirement with $2,000,000 in blue-chip stocks, they will see the income from their portfolio at a rate significantly above the rise in inflation—almost nothing else comes close, and that is why blue-chip stocks are such a recurring theme on this site. And if someone is still a ways off from needing the income for retirement, the amount of income growth can still prove staggering.

Imagine a blue-chip portfolio that consists of nearly thirty stocks of $67,000 in size. One of them is Johnson & Johnson. Here’s how the scenario would have played out during the 2007-2014 stretch. If you were in retirement, your $67,000 would have purchased 1,002 shares that would have generated $1,623 in 2007. By 2014, those 1,002 shares would now be generating $2,805 per year. Your annual income grew 72% in total even while you were spending each Johnson & Johnson dividend along the way. Unlike bonds, pensions, or whatever—you got to get more spending power each year even as you spent the dividends you were receiving.

If you were far off from retirement, or were in a position where you didn’t need the money, the results would have been even better if you were in a position to reinvest. That makes things more interesting because you got to grew your position from 1,002 shares to 1,272 shares because you spent seven years taking the cash thrown off and plowing it into even more shares of Johnson & Johnson. In that case, the $1,623 in 2007 income would have grown to 1,272 JNJ x $2.80=$3,561 in annual income today. In this case, the growth of your income amounted to a 119% gain in annual income produced over the 2007-2014 stretch.

If the other 29 stocks in the portfolio shared the same growth and reinvest characteristics as Johnson & Johnson over the 2007-2014 period, then we are talking about a $2,000,000 portfolio producing $60,000 in 2007 going on to produce $103,696 in 2014 without dividends reinvested or $131,645 annually in 2014 if all the dividends had been able to be reinvested throughout the seven years.  And, of course, the portfolio value would be somewhere in the $4,000,000-$5,000,000 range, depending on your reinvestment decisions and the actual stocks you had chosen.

In short, you gain something significant by choosing those 2% and 3% yielders today. An income investment is worth not only what it is able to generate in income today, but also what it can generate in income in the future. There is the current payout component + future growth rate that will determine its value to you. On that first element—current payout component, most real estate investments will clobber most common stock investments. It is the second element where things get more interesting—the best Dividend Aristocrats regularly give you raises in the 8-12% range, and it is unlikely that a real estate portfolio can do that for you.

I’m not saying it’s always better to build a blue-chip stock portfolio than a real-estate portfolio, especially because the amount of money reinvested will be heavily in favor of someone making a real estate investment. Sticking with our example above, someone spending $60k per year with a $2m stock portfolio would be relying on dividend growth to find his gains. Someone spending $60k per year and generating $200k with his real estate holdings gets to reinvest $140k into a new property which could then throw off $14,000 annually on its own.

To me, it’s about the degree of passivity that comes with a well-chosen investment like Nestle, Colgate-Palmolive, Philip Morris International, Procter & Gamble, Coca-Cola, and Johnson & Johnson. You get to see the dividend grow 8-12% annually, and you get the income growth and capital gains that accompany it without any further work on your part. They’re largely self-propelling wealth creating machines that get ignored because people are turned off by $30 checks generated by $1,000 initial investments and a tendency to underestimate what reinvested dividends can do to your future income and net worth.