The case for dividends over real estate

BMO senior economist Robert Kavcic continued to bang the drum for equity dividend and fixed income investment over real estate in a Thursday research report.

Earlier this month, Mr. Kavcic noted that speculators were “almost completely absent” from the domestic housing market, particularly in Toronto. The reason, he wrote, is that a real estate investor putting a 20-per-cent down payment on the average income property could not generate enough rental income to make full mortgage payments at current borrowing costs.

In Thursday’s report, the economist argued that dividend stocks are superior to income properties as investments. For one, even a one-year T-bill generates more yield than the average Toronto income property. High dividend stocks can easily be found with yields that exceed returns from an income property in the current market.

Mr. Kavcic noted that both real estate and high quality dividend stocks offer capital appreciation over time and regular payouts can be expected to at least increase at the same pace as inflation. What makes dividend stocks superior is the preferred tax treatment of payments, liquidity, and bypassing a regulatory environment favouring tenants.

The conditions that make income properties uneconomic now by BMO’s calculations won’t last forever. Some combination of housing price, average rent and mortgage rate data could make real estate much more profitable in the coming weeks.

At the same time, it is important to remember that the domestic housing market benefitted significantly from more than 30 years of steadily falling borrowing costs starting in late 1990. If we have entered an extended period of rising rates, Canadians’ reflexive faith in real estate investment is likely to be tested.

– Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

A year ago, macroeconomic factors such as interest rates and GDP growth accounted for 69 per cent of stock market returns, according to Goldman Sachs chief U.S. equity strategist David Kostin. This year, individual company news dominates, responsible for 71 per cent of returns. Based on this, investors should look at companies like Moderna MRNA-Q, Netflix NFLX-Q and Tesla TSLA-Q. Scott Barlow has more.

The Rundown

When it comes to what big business is doing to address climate change, corporate leaders would rather not talk about it. As sustainable investing has become a cultural flashpoint in the United States, the term “ESG” has been practically expunged from the corporate lexicon. Tim Shufelt on the rise of “green hushing.”

GIC rates are now at the point where 5-per-cent returns must be considered good, but not great for terms of one through three years. Rob Carrick on asking the question: How much better than five per cent can I get?

A frantic recalibration of long-term borrowing rates has unnerved financial markets trying to parse both many of the positive reasons behind the move and worrying implications of a fresh hit to bond markets. Reuters reports.

Others (for subscribers)

Friday’s analyst upgrades and downgrades

Insider Report: Executives land million-dollar paydays at two large-cap companies

Globe Advisor

Why this money manager is hanging on to tech stocks and adding more resources

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Ask Globe Investor

Question: Are ETFs such as XBB, which trade like stocks but hold bonds in their portfolio, taxed by the CRA as are shares in a corporation or like bonds? – Al O.

Answer: Distributions are taxed based in their nature – interest income, dividends, capital gains, return of capital, etc. These are calculated by the sponsoring company, and you’ll receive a tax slip from your broker. In the case of XBB, which is a universe bond fund, most of the distribution income will be in the form of interest and taxed accordingly, unless the units are held in a registered account.

Sales of an ETF are all calculated as capital gains or losses, regardless of whether the fund invests in stocks, bonds, or anything else.

– Gordon Pape

What’s up in the days ahead

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Compiled by Globe Investor Staff