An analysis by Daily Investor revealed that buying property and investing the rental income in the S&P 500 delivered far better returns than investing in gold.
Many believe buying and owning property is one of the best ways to generate wealth. Property is generally seen as a safe, risk-averse investment that can create wealth and, in some cases, extra income if one rents out that property.
Gold, in comparison, is seen as a speculative asset that provides a safe haven for investors during uncertain times.
While many people invest in gold to diversify their portfolios and hedge against inflation, it is not generally seen as a way to get rich and could have many drawbacks.
For example, Efficient Group chief economist Dawie Roodt recently said he prefers other asset classes like equities over gold.
The main reason is that gold is not a productive asset. “If you buy a Krugerrand today, it will still just be one Krugerrand in a year’s time,” he explained.
So, while the value of gold may increase over time, it is not an asset like buying shares in a company that pays dividends.
“I don’t like gold as an investment because it does not give you a return. It may give you capital protection, but not a return like dividends,” he said.
Previously, Daily Investor compared the returns of buying a house versus investing in gold over 50 years.
Daily Investor has also analysed the returns of investing the rental income from a property in an inflation-matching investment versus the returns of buying gold over 50 years.
In both these comparisons, gold came out as the clear winner.
However, to see whether gold truly reigns supreme, Daily Investor analysed the return on rental income from a property if invested in the S&P 500 versus investing in gold over 50 years.
The price of gold has significantly increased over the past 50 years. In 1970, one ounce of gold cost R26. Today, one ounce of gold costs around R38,500.
This translates to an annualised compounded growth rate of 14.5% over the 54-year period.
The average house in 1970 cost R15,084. Using the Absa Property Index, the same property should cost around R2.4 million in 2023.
If an investor had invested R15,084 into gold in 1970, it would have bought 546 ounces of gold.
Today, the value of 546 ounces of gold is R21,067,229, which is significantly more than the value of the comparable property.
However, if an investor had invested all the rental income from the property into the S&P 500 from the day it was purchased, it would change the dynamics significantly.
Daily Investor calculated what the present value would be if all these rental payments were invested in the S&P500, assuming there were no market frictions.
An average annual rental yield of 10% of the property value was used based on the average rental yields in Johannesburg, Cape Town, and Centurion.
The following deductions were made from each year’s rental income:
- Annual maintenance – 1% of value per annum
- Water and electricity – 1.5% of value per annum
- Levies – 1% of value per annum
- Rates and taxes – 0.7% of value per annum
The present value of all rental income invested into the S&P500 would be R37 million. Adding the property value of R2.4 million gives a total value of R39.4 million.
It is important to note that the S&P500 is a price index, meaning that it does not take into account dividend returns.
Daily Investor calculated that the S&P500 paid an average annual dividend yield of 2.78% since 1970.
When taking the dividend yield into account, an investor would most likely have a total present value of R99.3 million from all S&P500 returns.
When adding the present-day value of the property, this amounts to a total value of R101.6 million.
This does, however, not take any dividend withholding tax into account.
|Property + Rental Income invested in the S&P 500, (re-invested dividends)