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5 Reasons Why Dividend Stocks Like Royal Bank of Canada Are Better Investments Than Rental Properties

It’s never been more difficult to build an investment portfolio with high yields, an ever-growing income stream, as well as solid capital growth.

In the current low interest rate environment, traditional income investments are offering little to no returns while the costs associated with borrowing to invest are at all-time lows. Investment properties have therefore become increasingly popular among income-hungry Canadians, with rental yields in major cities now at 4% to 6%.

But let me show you why constructing a balanced growth-oriented dividend portfolio is a far better investment than any rental property.

1. Dividend stocks have significantly greater liquidity

A key problem with property investing is the lack of liquidity. Often, it takes considerable time to dispose of a property, preventing investors from accessing their funds when they need them the most.

Stocks, however, can be sold at the push of a button. More importantly, in a cash crunch where you may need to access a portion of your capital, you can sell some of your stocks. You can’t sell an investment property brick by brick or square meter by square meter.

2. Dividend stocks are far lower cost to acquire, hold, and sell

The costs associated with investment properties are almost prohibitive. Solely to acquire or dispose of an investment property incurs a range of costs including listing fees, inspection fees, legal fees, land transfer tax, adjustment fees, mortgage fees, mortgage insurance, other insurances, and real estate agent commissions.

On top of that, there are a range of ongoing expenses including maintenance, rates, and property management fees if you don’t manage the property yourself — all of which can add up to tens of thousands of dollars, eating into your returns.

Whereas for dividend stocks, you only pay a brokerage fee when you acquire or dispose of the investment. These fees are minimal, now as low as $9.99 per trade for do-it-yourself Internet brokers. Furthermore, there are no ongoing fees or expenses, allowing you to enjoy dividends and capital growth in their entirety.

3. Ease of maintenance and lower risk compared to investment properties

Rental properties can be time-consuming, difficult, and stressful to manage especially if you attempt to manage the properties yourself. There are also considerable risks involved, which can interrupt your income stream as well as create further costs and stress.

These include vacancies, which mean you have no income but still have to pay for all of the expenses related to the property and continue meeting mortgage repayments. Another key risk are bad tenants, who can withhold rent, damage the property, and refuse to leave, leading to the expenditure of significant amounts of time and money to rectify the situation.

Once you have purchased your portfolio of dividend stocks, however, you can sit back and wait worry-free for the dividend checks to start rolling in, without having to expend any further, energy, time, or money.

4. Even for a small investment, you can build a diversified stock portfolio

With the average Canadian house price now nudging $400,000, it is extremely difficult for property investors to diversify into other investment properties or assets, with the majority of their investment capital tied up in just one or two properties. This then creates significant risks associated with all of the funds placed in one basket.

It only takes a mild property correction, which now is certainly in the cards, to wipe thousands off the capital value of the investment, or worse, a bad tenant or long-term vacancy to take away a significant portion of the rental income.

But with as little as $20,000, you can purchase a diversified basket of dividend-paying stocks that encompass different companies, industries, and sectors, meaningfully reducing risk while enhancing income and  the opportunity for capital growth.

5. A steadily growing income stream

Property investors are held hostage to the vagaries of the property market, with supply and demand for rental properties impacting vacancy rates and market rents — not only causing rents to fall but increasing the risk of long-term vacancies. With a dividend stocks, however, quality companies have a history of regularly hiking their dividends over time, meaning that with each passing year, you receive ever-growing checks in the mail.

What could a diversified dividend growth portfolio look like?

As I mentioned, for as little as $20,000, an investor can construct a diversified high-yielding dividend stock portfolio with a sustainable income stream. Let’s take a closer look at what a five-stock industry-diversified portfolio might look like.

Company Industry Market Cap Dividend Yield Payout Ratio
Royal Bank of Canada (TSX: RY)(NYSE: RY) Banking $119B 3.7% 52%
Canadian Oil Sands Ltd. (TSX: COS) Independent Oil & Gas $11B 6.4% 86%
Fortis Inc. (TSX: FTS) Utilities $7B 3.7% 84%
Husky Energy Inc. (TSX: HSE) Integrated Oil & Gas $33B 3.6% 60%
BCE Inc. (TSX: BCE)(NYSE: BCE) Telco $37B 5% 93%

Sources: Yahoo! Finance, company filings.

As you can see, the portfolio is diversified across five industries, composed of large-cap companies that give financial security, and has a sustainable dividend yield of 4.5%, well within the range of rental yields in major cities. These industries have high barriers to entry, which helps each company maintain its economic moat and long-term competitive advantage.

You’re far better off taking advantage of these superior investment opportunities than buying rental properties with mediocre returns and lots of headaches.

Your instant 5-stock portfolio

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Fool contributor Matt Smith has no position in any stocks mentioned.

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