Hi Parmdeep,

Developing this theme a bit further, both stock and property have two components to yield - in property, the gross yield is annual rent divided by property value (eg £400 pcm x 12 rent divided by £65,000 property value = 7.38%) and the stock yield is the annual dividend (eg Royal Dutch Shell stock at £21.50 attracts a yearly dividend of £1.07 = 5%). Both have operating costs - the property yield has agent fees, maintenance, insurance - and mortgage if your investment is leveraged, and the Shell stock has broker fees - if applicable, and financing fees if you choose to leverage your stock portfolio.

Both have (in theory) also a component of capital value appreciation. When a property increases in value, we think of that as an inflation-related increase, and during the last decade that has been so high as to make the net income from rentals relatively insignificant, especially if the property is mortgaged at 85%. A property price increase of 10% from £65,000 to £71,500 means your equity of £9,750 has increased by £6,500 or 66.6% in a year.

Both investments cut both ways. Shell stock can fall to £13 per share, and the £65,000 property can fall to £45,000 in value. For a young investor starting out with high leverage, this can be devastating if the gross yield cannot cover the operating costs which includes debt interest payments. For the much lower risk older or richer person, that just means his net income is lower, but he is not in jeopardy of losing his asset base if there is no debt on the property.

Interestingly, if either stock prices or property prices fall, but dividends (or rents) do not, the yield increases on both investments. In a way, this defines a market bottom. When yields are so high as to make a compelling case for investment, buyers do re-enter the market and stabilize prices based on current yields. Quite how far this can go depends on rationality, but I am convinced that there is enough free cash in the world to stop property falling too far. With regard to stock investments, the underlying value is merely a piece of paper, and even some of the FTSE 100 companies in the past have become worth zero.

For my money, property wins all the time over stock. A bit of both would not go amiss, but for most people, that is a decision of risk versus reward. In the last 20 years, the expectation that stock values will keep up with inflation have proven to be unfounded. Not the same with property.

__________________
Just because you are not paranoid, it doesn't mean they are not all out to get you

Total Awards: 1
Total Points: 0