This article is a reply to a reader who commented on "How to invest spare cash". For other articles on the property vs. shares debate, click here:

 

Question:

How come no one ever mentions the difference between the dividends that you generally never get, or are very low, when buying shares versus the rental income from property which is consistent and predictable?

This changes the value of the investment significantly. The only reason I can think of is that you don't pay financial advisors commission on your property investments and therefore they have a vested interest in making them look unattractive.

Answer:

I can appreciate your concern with advisers only promoting certain products that pay a commission and downplaying those that they can't sell. This is sadly something that does happen from time to time.

However, realistically, an adviser cannot receive commission if they promote a direct share portfolio (only a trader can) and these days an adviser can receive commission by punting property as a good investment by way of using property unit trusts. A true financial planner advises what's right for the client and then charges a fee for advice; they do not receive commission on selling a product.

You are quite right when comparing property and share portfolio returns; dividend and rental income are not included. The reason is that both are so varied (some shares pay great dividends and some hardly ever; properties sometimes stand vacant and rentals vary from area to area) it would be difficult to average a return.

Rental income is taxable and dividend income isn't. This could almost equalise the returns, but even so I think rentals pay more especially if the property is bonded and you can get tax relief as well as the benefits of gearing.

Based on the statistics I used in my article (click here to read it), if one had invested long term in shares, the return (bar income) received would have been about 18 percent. The return (capital growth) on residential property would have been 11 percent.

Add an average dividend yield of four percent per annum to capital growth and the total return could have been roughly 22 percent per annum. You would need a long term average rental income of more than 12 percent (after tax and costs) to beat that.

The problem with both shares and property is that some perform poorly and some perform well, and if you are a specialist in each field you should potentially do well in either.

But what does a man on the street do?

The less risky option is to buy a share portfolio. A portfolio consists of a basket of shares, thus diversifying the risk of one or two shares performing poorly.

This diversity can be obtained in residential property too if you have a lot of properties. The average person who invests in residential property may have between one and four extra properties only so the risk is great. And when you take a great risk, you can earn a great reward (or not!).

So, yes, when rental income and gearing are taken into account, if all goes well, you can make just as much as shares, maybe more. I like both alternatives (certainly choosing one or the other is better than not investing!), but if you feel property may work better for you than shares you will enjoy the investment process more and that counts for something too.

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals’ personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.

 

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