The popularity of investment properties among investors has boomed in recent years with low interest rates, low unemployment and growing salaries feeding a frenzy of investment in the housing market. This has seen housing prices enter bubble territory with much of the frenzy being driven by investors seeking “bricks and mortar” security coupled with a regular income stream.
But I believe solid “blue chip” dividend paying stocks make far superior investments for income hungry investors. Let me explain why:
1. Housing prices are caught in a bubble
Cheap debt and a strong economy have fueled a boom in Canada’s housing sector. This now sees housing prices in the major cities like Toronto and Vancouver firmly out of whack with historical averages.
Housing prices now significantly outpace incomes and rents. The median house price is now nine times the median income compared to a historical average of 4 times while the price-to-rent ratio – a key measure of housing affordability – has widened 75% over the last 12 years.
Yet despite this, housing prices continue rise, with the national average by the end of September 2014 growing by 6% year-over-year. While Toronto and Vancouver were the biggest gainers seeing the average house price spike 7.5% and 6.4% respectively for the same period.
This illustrate the significant costs of purchasing an investment property coupled with the ever growing risk of a correction, which would erase millions of dollars from the net worth of property investors.
2. They are attractively priced
Stocks appear attractively priced in comparison to investment properties. Even companies with quality businesses, stable earnings and recurring dividend payments appear cheap in comparison. This is because stocks have been hit hard over recent months because of fears about the direction of the global economy and a market correction.
But with strong economic data coming from the U.S. and recent gains in global markets this has now subsided and a rebound may be underway. I believe four of the best stocks for income hungry investors are electric utility Fortis Inc. (TSX:FTS), Canada’s largest telco BCE Inc. (TSX: BCE) (NYSE: BCE), transportation services provider to the energy patch Enbridge Inc. (TSX: ENB) (NYSE: ENB) and life insurer Manulife Financial Corp. (TSX: MFC) (NYSE: MFC).
3. Provide greater diversification
Typically, property investors only have sufficient funds to buy one or two residential investment properties making it impossible to diversify across asset classes or even geographically.
This leaves them exposed to the vagaries of local property and rental markets. This has the potential to impact both the value of their investment and their income stream should rental demand decline.
Whereas, by investing in the dividend stocks investors gain access to a range of geographically diversified businesses with operations inside and outside of Canada across a wide range of industries and economic sectors. This protects them from changes in the economic cycle helping to shield the value of the investment and dividend stream.
4. Provide greater liquidity and consistent regular income
Another important attribute is dividend stocks provide greater liquidity and a more secure income stream than rental properties.
Selling an investment property can be a lengthy and costly business. In contrast, dividend stocks can be readily sold (and bought) at the click of a button.
More importantly, while rents may fluctuate based on supply and demand for rental properties (or cease altogether), blue chip dividend stocks consistently pay a recurring income stream year-in and year-out.
Fortis has paid a steadily appreciating dividend every year since inception in 1972, while Enbridge hasn’t missed a dividend payment since 1953 as well as hiking its dividend for the last 19 consecutive years. BCE also has an impressive record, having paid a dividend since 1949, which has been hiked every year since 2009.
Strong growth in housing prices makes it easy to be caught up in the rush to invest. But with a correction due and major dividend paying Canadian companies appearing attractively price they are a far better investment option.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Matt Smith has no position in any stocks mentioned.