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

The flat bottom mine recently came up for sale and I was tempted to snap it up as a buy-to-let, just to buy another dividend stock instead. What is wise?

This is a nice flat and cheaper than a year ago. It can secure a growing income stream for life, plus capital growth as house prices recover.

Property or shares?

But buying other properties will also bring many problems that I don’t have to deal with when buying shares.

First, the upfront cost is more. If I paid £350,000, I would have to pay stamp duty of £15,300, including the 3% investor surcharge. That’s 4.37% of the cost, against 0.5% stamp duty to buy shares. I also have to pay a fee to buy a mortgage.

Flat needs new kitchen and bathroom. The other was £15,000 and the windows also needed replacing, plus there was damp. I wouldn’t have this problem if I bought the stock.

I have to pay trading fees when buying and selling shares, plus an annual monthly platform fee, but for a long-term buy-and-hold investor like me, this is minimal. In contrast, flats have service charges of around £700 a year, plus ongoing maintenance costs.

I don’t pay anything if I hold shares. Even better, I can buy selected dividend stocks in my annual Stocks and Shares ISA allowance. That way all my income and capital is tax free, for life. I don’t even have to mention it on my tax return.

If I invest £5,000 a year in a share ISA that yields a total average return of 7% per annum with dividends reinvested, I will have £83,754 after 10 years. If I continue for 20 years, I will have £238,674. That’s a pretty good return on a £100,000 investment, and I don’t have to deal with annoying tenants. Those numbers aren’t guaranteed, of course, but they look good to me.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor does it become, any form of tax advice. Readers are responsible for conducting their own due diligence and seeking 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 there are now many top companies that offer high yields. The insurer Legal & General pay an income of 7.67% a year, for example. If I want exposure to the housing market, Barratt’s Development yields 8.23%.

In contrast, the yield on investment property will be only 4.63% a year (or 4.41% if I include stamps in the calculation).

Investing in dividend stocks is not without risk. Shareholder payouts are not guaranteed. As we have seen in the pandemic, it can be cut at any time. The stock market could collapse. The company may even go out of business.

I would counter that threat by investing in a portfolio of around 12 to 15 FTSE 100 stocks. If one of the two struggles, hopefully the other will compensate. Buying a dozen or more stocks is possible, while building a buy-to-steal portfolio seems overwhelming.