Why BCE Inc’s Dividend Is a Better Option Than Rental Income

BCE Inc. (TSX:BCE)(NYSE:BCE) has a dividend yield about equal to rental cap rates. Here’s why you’re far better off with BCE.

| More on:
The Motley Fool

As so many Canadians near retirement, buying rental property has become a popular way to generate some income from hard-earned savings. But this is not a smart investment at all.

To make this point, below we compare rental property with buying shares of BCE Inc. (TSX: BCE)(NYSE: BCE), one of Canada’s most attractive dividend stocks.

Why you shouldn’t buy rental property

Let’s start with the simplest reason not to buy rental property: the yields aren’t high enough.

According to the latest CBRE survey, yields on Canadian apartments (known as cap rates) are at roughly 5%. But this number doesn’t include property tax, maintenance, insurance, and other fees (such as condo or property management fees). Altogether, this can take a big bite out of your returns.

There are other costs to consider. For example, finding good tenants can be a lot of work. And if these tenants run into financial difficulties, that creates a whole other headache.

Secondly, there are concerns about Canadian real estate values. Just last week, Bank of Canada governor Stephen Poloz argued that Canadian real estate prices are 10-30% too high. If he’s right, and the market does go through a correction, then returns from rental property could take a big hit. This is a significant risk for investors, especially since rental property is financed mainly through debt.

The case for BCE instead

BCE is likely your best option if you want big regular payments from a S&P/TSX 60 company. At 4.8%, it’s the eleventh highest-yielding stock on the index, but the top 10 companies are all struggling mightily (eight of them are energy producers).

So BCE has a yield fairly similar to the cap rates from rental property. But BCE doesn’t come with any of the other associated costs like maintenance and insurance. You don’t need to find a tenant or worry about credit risks. You also don’t need to worry about Canadian real estate values.

Besides having fewer risks, there is arguably more upside in BCE’s shares too. To illustrate, the company’s dividend has roughly doubled over the past 10 years. Meanwhile, there’s a limit on how much rent prices can increase in a given year. In 2015, that limit is a measly 1.6%.

Better yet, buying BCE stock is cheap and easy. Odds are you’ll pay $10 for the trade, far less than you’d pay a real estate agent, and you’ll own the stock with just a few mouse clicks.

There are other options

BCE is just one example of a safe dividend stock you should own instead of rental property. There are others too. For example, if you’re willing to take a slightly lower yield, you can expect greater dividend growth. See below for more examples.

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 Benjamin Sinclair has no position in any stocks mentioned.

More on Dividend Stocks

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Royalty: 3 Fabulous Stocks to Buy Now for Decades of Passive Income

Rogers Communications stock and Canadian Natural Resources stock could pay you dividends for decades to come.

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in April 2024

For growth and dividends this April, look to these two REITs that have quite the promising present as well as…

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »