If you had $25,000 to invest, which of these three options do you think would provide the highest return with the lowest risk—dividend-paying stocks, 30-year U.S. Treasury bonds, or solar panels?
If you said stocks, you’re in good company. That’s what people are talking about these days—blue-chip dividend-paying stocks that are currently yielding between 3 and 4 percent in a low-inflation environment. If you said bonds, which offer a similar yield, you have plenty of company as well in the crowd that is turned off by stock market volatility.
However, you’d have given up control of your money—to Wall Street, to government regulation, to the fortunes of the companies, the competence of management, trends in industry, the next recession, geopolitical events and so on. You could make out like a bandit, but you could also lose more on your principal than you’ll earn on dividends.
Finally, the IRS gets its cut, reducing that $1,000 (at 4 percent) in dividend income on $25,000 worth of stock market exposure to as little as $800.
Solar panels, on the other hand, will not become more valuable over time, and you couldn’t sell them off your roof to meet a financial emergency. But if your instinct was to choose solar panels anyway, congratulations! You understand a basic concept that I spend much of my time explaining to clients—the best investments are generally those over which you have the greatest control of risk, cash flow and taxes. In the case of solar panels, these days in the District, neither stocks nor bonds can come close.
The financial return on a $25,000 investment in solar-retrofitting a home in the District includes several layers of tax credits (not just deductions), reduced electric bills, income from selling excess power back to the grid, increase in home value and saleability. D.C. homeowners currently enjoy the best of urban and federal tax breaks, earning an “A” ranking from solarpowerrocks.com, a consumer-driven information web site.
Using the theoretical $25,000 system as a example, the site estimates that after tax breaks and other savings, the cost would fall to about $10,000 at the end of the first year, pay for itself within five years and increase the value of an average home by about $35,000—with no increase in assessment for property tax purposes.
There are two lessons here. First, in D.C. you can go green and enjoy a healthy rate of return. Second, doing so illustrates a basic tenet of investing—before you let yourself be seduced by those juicy dividends and appreciation potential of stocks, consider investing in something you control, whether it be solar-upgrading your home, whole life insurance, real estate, your business or profession.
Your financial life is like a bucket with holes in it that constantly leaks money—living expenses, taxes, inflation, etc. To keep the bucket full you can try to pour more in by chasing the latest fad on Wall Street. That’s the hard way. The easier way, and the way you have the most control, is to plug up some of the holes by investing in things like solar that make you money by saving it.
John E. Girouard, CFP, CHFC, CLU, CFS, is the author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors, in Bethesda, Md.