Even though self-directed IRAs allow account holders to invest in a very wide range of investment types, there’s sometimes a tendency for those account holders to get locked into those that they might not invest in with their taxable accounts. But depending on your investment goals and financial needs, some of these more “common” investment types can be a great fit.
Take dividend-paying stocks, for example. These are a mainstay of many investors’ taxable account portfolios, but they may be a great fit for the self-directed IRA as well. Here’s why.
You Can Adjust Your Holdings Easily.
Owning real estate can provide a wide range of investment advantages, to be sure. But if you’re holding property in your self-directed IRA directly (as opposed to holding shares of a real estate investment trust, for example), then you need to fully understand how liquid or illiquid your investment might be.
Liquidity issues with respect to real estate can come in two basic variants. First, depending on the local market conditions for your particular piece of property, you may not be able to sell their property when you want or need those funds. Secondly, for all intents and purposes liquidating real estate is an all or nothing approach.
You’ll have better options with dividend paying stocks. For example, if you hold dividend stocks you can sell 5%, 10% or 50% of your holdings (or increase your holdings by similar amounts) quite easily. But you can’t quickly or easily sell half of a single-family home that you own for rental purposes.
Dividend Stocks Have an Established Track Record.
Publicly traded companies that have been around for decades have a long established track record of paying dividends. While there’s very little in the investment world that’s guaranteed, you can be confident that companies which have raised their dividend payouts every year for the last 10, 20 or more years are going to make it a business priority to continue doing so in the future.
Holding any investment that generates regular income comes with a built in concern; namely, how you’re going to put that dividend income to work. For example, with a real estate investment you receive rental income checks each month. But you can’t use that income to buy more of the same house since you already own it. You need to find some other way to put that income to work.
With the income you receive from dividend paying stocks, it’s possible to simply purchase more of the same stock. After all, if you believe in the investment enough to hold it in your account, then you’d probably be comfortable owning more of it. And owning more stock means that your next dividend payment will be higher. That’s the power of compounding.