Dividend stocks and rental properties can both be excellent vehicles for building wealth. Although both assets provide a steady stream of cash flow, one or the other may be more suitable for individual investors based on how active a role they want to play in managing their investments. Dividend shareholders only need to sit back and wait for the corporation to send a regular check. While rental property owners can usually collect a fatter paycheck, they also are responsible for every aspect of managing the rental properties. Owning rental properties often comes with more than a few management headaches, which can include expensive repairs or collecting from tenants who refuse to pay.
For investors who feel more comfortable buying assets they can see and touch, rental properties have a distinct advantage over dividend shares. Shares of a corporation -- although they do represent ownership in the corporation -- really come down to being a contract between the investor and the company paying a dividend. The owner of a dividend stock is entitled to a share of a company's profits. Rental properties, on the other hand, are physical assets.
Dividend stocks can be bought and sold with the click of a computer mouse, which makes them very liquid investments. When investments are liquid, it means they can be quickly and easily converted to cash without losing substantial amounts of value. Rental properties, by contrast, are not liquid. It could take months or years to sell a rental property. The buying and selling costs of rental real estate are quite substantial too, compared with the costs of stock transactions. If the owner of a rental property needed to sell it quickly in order to raise cash, he might need to drop the price below market value to attract a buyer.
The owner of a dividend stock has no say in how the company is run. The CEO will not likely accept telephone calls to hear the opinions of shareholders. In fact, the company's board of directors could even decide to reduce or even eliminate a company's dividend payment. Rental property owners, however, have more control over their investments. Landlords decide when to raise the rent and they can be creative in controlling costs. Rental property owners have the freedom to make management decisions that can add value to an investment in a way that is not possible for owners of dividend stocks.
Rental properties are usually bought with borrowed money. Using borrowed money for rental property is a form of leverage that can increase an investor's return. If an investor buys a $100,000 rental property with only $10,000 as a down payment and collects $8,000 in rent the first year he has made an 80 percent return on his $10,000 investment. Using borrowed money to buy dividend stocks, however, will usually produce a negative return. Solid dividend stocks typically pay between 3 to 6 percent annually. So, unless an investor can borrow money at less than 3 percent, the interest payments will cost more than he receives in dividend payments.
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