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Forget buy-to-let! I’m generating lifelong income from dividend stocks 

Modern apartments on both side of river Irwell passing through Manchester city centre, UK.

The flat below mine recently came up for sale and I was tempted to snap it up as a buy-to-let, only to buy more dividend stocks instead. Was that wise?

It’s a nice flat and cheaper than a year ago. It could secure me a rising income stream for life, plus capital growth when house prices recover.

Property or shares?

Yet buying a second property will also bring me a host of problems that I simply don’t have to deal with when I buy shares.

First, the upfront cost is much greater. If I paid £350,000 I’d incur an upfront stamp duty charge of £15,300, including the 3% investor surcharge. That’s 4.37% of the cost, against 0.5% stamp duty on share purchases. I’ll need to pay arrangement fees on a buy-to-let mortgage too.

The flat needs a new kitchen and bathroom. That’s another £15,000 and a window also needs replacing, plus there’s damp. I won’t have any of these issues if I buy stocks.

I do have to pay trading charges when I buy and sell shares, plus an annual monthly platform charge, but for a long-term buy-and-hold investor like me, these are minimal. By contrast, the flat has a service charge of around £700 a year, plus ongoing maintenance costs.

I don’t pay any of that when I hold shares. Better still, I can buy my chosen dividend stocks inside my annual Stocks and Shares ISA allowance. That way all my income and capital growth is free of tax, for life. I don’t even have to mention them on my tax return. 

If I invested £5,000 a year in a spread of ISA stocks that delivered a total average return of 7% a year with dividends reinvested, I’d have £83,754 after 10 years. If I carried on for 20 years, I’d have £238,674. That’s a pretty decent return on a £100,000 investment, and I won’t have to deal with a single troublesome tenant. Those figures aren’t guaranteed, of course, but they do look good to me.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Buy-to-let is too much trouble for me

Another reason I prefer to buy dividend stocks is that right now there are loads of top companies offering sky-high yields. Insurer Legal & General pays income 7.67% a year, for example. If I wanted housing market exposure, Barratt Developments yields 8.23%.

By contrast, the yield on my investment property would be just 4.63% a year (or 4.41% if I include stamp duty in my calculation).

Investing in dividends stocks is not without risk. Shareholder payouts are not guaranteed. As we saw in the pandemic, they can be cut at any time. Stock markets can crash. Companies can even go out of business.

I’ll get round most of these threats by investing in a portfolio of around 12 to 15 FTSE 100 stocks. If one or two struggle, hopefully others will compensate. Buying a dozen or so stocks is doable, whereas building a portfolio of buy-to-lets looks like too much bother.

The post Forget buy-to-let! I’m generating lifelong income from dividend stocks  appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.