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Buying Dividend Stocks vs Paying Off Your Mortgage
Posted on | August 1, 2011 | Comments Off
It’s an age old argument: investing vs paying off your mortgage. Until recent years, the consensus view was that you should always invest your money. It was considered obvious that you could make a better return on your money than the fixed 30-year rate associated with your mortgage.
Let’s acknowledge the fact that Wall Street is the primary beneficiary of such a widespread idea. They make money on the mortgage debt and the investment side.
Now that high returns are not necessarily obvious in stocks, even in longer time frames, more people are starting to reconsider whether or not this is a good idea.
The reality is that you should probably do both. Paying off your mortgage and building your dividend portfolio doesn’t have to be exclusive items. I don’t really want to pay off my mortgage too fast because if massive inflation kicks in, I would have been better off having the debt. On the other hand, if the economy really struggles and something happens, I don’t want to have all my eggs in the investment basket which can take a hair cut in a market crash when I’d rather have lower debt levels.
The answer is indeed to do both at the same time. Put your game plan together to allocate excess cash towards both paying down your mortgage debt and building your investment portfolio. A fixed rate mortgage (especially at today’s rates) can be a good inflation hedge (probably even better than stocks). Your 5% mortgage could get inflated away to where paying that payment each month is fairly trivial.
I think a good goal is to pay off your mortgage in ten years. This is very aggressive for some people, but I think it’s definitely doable for the those who work hard and are good with their money. I think that you can also build a nice portfolio during the same ten year period. When your mortgage is paid off, you can then allocate even more funds towards your investment portfolio.
Another idea is to change the amounts that you put towards your mortgage and your investments depending on the market. If the market is over-heated and stocks are expensive, it might make sense to put more money towards your mortgage. If the market crashes and stocks are trading for bargain prices, you might halt putting extra money towards your mortgage and instead try to accumulate as many shares as possible of quality stocks that you know are going to be fine over the long term. I think this is the best strategy, but it means you really need to be in tune with the market.
It’s tough to find a ton of inexpensive stocks currently, therefore, you might consider putting more money towards your mortgage. As stocks correct, you can shift that allocation back towards dividend stocks.