How to treat shares like an investment property

There may be some lessons in looking at ASX dividend shares through a property investor's lens.

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It's one of the longest-running battles in investing history – shares vs. property.

Both are income-producing investment vehicles. Both have minted billionaires. And both have bankrupted careless investors. I don't think there will ever be a clear winner. Over the last 100 years in Australia, shares, and property have both delivered similar returns for investors on average (around 10% per annum).

If you take the last 5 years however, the Australian property market has vastly outperformed the Australian share market. We only have to look at the performance of the Vanguard Australian Shares Index ETF (ASX: VAS) over the past 5 years which has given a return of around 7.4% p.a (including reinvested dividends), whilst the Vanguard Australian Property Securities Index ETF (ASX: VAP) had returned around 13% in the same period. Although VAP follows Real Estate Investment Trusts (REITs), which typically are weighted more to commercial and industrial real estate, it's a healthy comparison in my opinion. But all investments have their time in the sun, and the past is no indication of the future.

I recently watched a video featuring a well-known property investor discussing his modus operandi – all about the cash flow. He said that he doesn't care if property prices or the economy crashes, because the rental income he receives will not – and might even rise as the rent-to-value ratio rebalances. If anything, it's an opportunity to buy more property. Everyone needs a place to live – this simple fact provides enormous price inelasticity to the rental market.

In my opinion, this is a fantastic and important lesson for stock market income investors. By focusing on the stability of dividend cash flow by looking at the product a dividend-paying company is selling, you can adopt this mindset.

Sydney Airport Holdings Pty Ltd (ASX: SYD) is a good example. As the only commercial airport in Sydney (and the only major international airport in NSW), you can be sure that demand for the company's services and therefore the dividend yield the company is likely to pay (currently sitting on 5.2%) will be relatively stable and will be able to (at the least) keep pace with inflation.

Diversification of earnings is also a positive factor, and this makes companies like Wesfarmers Ltd (ASX: WES) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) worthy options to consider as well. Through multiple and independent streams of income, these companies can also provide a healthy and stable dividend yield.

Of course, if you want direct exposure to the property market (and the high rental yields it provides), REITs can also be a great choice. Centuria Metropolitan REIT (ASX: CMA) is a good example of a quality REIT, currently yielding 6.69% (albeit with no franking credits attached).

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Foolish Takeaway

If you're all about that cash flow, considering quality ASX companies with stable profit bases is of paramount importance. At the end of the day, whether you are a shares or property income investor, both vehicles can offer stable and secure income bases – you just have to know what to look for.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited, Washington H. Soul Pattinson and Company Limited, and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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