Dividend vs. Growth Stocks
Both dividend and growth stocks are useful investments, albeit for different reasons. Hence, before deciding to invest in either of them, it’s important to understand the purpose of each type of stock, as well as the benefits and potential downsides. The most basic view of dividend vs. growth stocks is that growth stocks are best for those who are early in their careers. This is what’s known as the wealth accumulation phase. Dividend stocks, then, are better for those who are later in their careers and need income now. Dividend investors can’t always wait years for their stocks to grow in order to provide a return.
“Always” is the operative word here. The above is a generalization. And there are certain strategies that involve dividend stocks well before retirement. What is less likely, though, is investing heavily in growth stocks in retirement. Because you inevitably must wait years for the investments to pay off.
Investing In Dividend Stocks vs. Growth Stocks
Here, we’ll dive deeper into investing in dividend stocks vs. growth stocks. What we’ll find is that both can be great investments. But just how good they are will depend on what you hope to get out of them.
Dividend stocks are stocks from companies that regularly issue dividends, which come from earnings. Dividends can be issued annually, quarterly, or even monthly. Some dividend stocks pay dividends less frequently. And some may occasionally pay higher bonus dividends.
Companies that pay dividends, especially those paying them in regular intervals are usually established companies in income. And these companies are also generating businesses. Real estate stocks are always some of the best examples because rents are due monthly. Plus, in the case of REITs, they are required by law to distribute 90% of their taxable income back to shareholders.
Receiving regular dividend payments sounds great for investors. But remember, this is money that can’t be reinvested into the business. This is why companies that pay high dividends are often well-established companies. Or, they are companies that don’t have a lot of room to grow. Older energy companies, such as those dealing in oil and coal may be another example.
On that note, high dividend payments are not always as attractive as they seem and can even be a red flag. Companies that are struggling can sometimes issue high dividends as a way to tempt investors. However, if the company doesn’t have the cash flow to cover its dividends, that could spell trouble for the future.
Keep reading for more information on dividend vs. growth stocks.
An important point worth noting in dividend vs. growth stocks is that growth investing is quite a different approach than dividend investing. Growth stocks may have a high price-to-earnings (P/E) ratio than other companies of a similar size. A high P/E ratio can make a company look expensive. But growth stocks are those that are projected to grow at a higher rate than their competitors.
Hence, you are banking on the prospect of the company you invest in growing rapidly. And, thus, your investment could grow by many times in just a few years. These companies are often innovative startups that may currently have little to no earnings. But they do have the promise of being one of the biggest names in the business before long.
However, growth stocks usually don’t pay dividends. This means you won’t immediately start earning an income from them. Instead, that money is reinvested back into the business. Because growth stocks are often companies that are new and still developing. If the bet pays off, you could be rewarded. And this means growth stocks can also be riskier than dividend stocks.
Dividend vs. Growth Stocks: Which Should You Choose?
Dividend stocks and growth stocks both have their merits under the right sets of circumstances. Broadly speaking, the idea is payoff now (dividend stocks) versus payoff later (growth stocks). The idea, though, is that growth stocks may have a higher ceiling. So those who invest for the long run may be rewarded handsomely for their early investment.
The problem, of course, is that it may take years or even a decade or more for growth stocks to really pay off. Growth stocks can also be riskier than dividend stocks. The latter often has a track record of years of consistent dividend payments.
But growth stocks are often new and haven’t proven themselves as strong investments. Hence, one can see why dividend stocks are often better for those who are later in their careers and thus have lower risk tolerance.
Still, even those who are earlier in their careers sometimes invest money in dividend stocks. They may combine these investments with their own real estate investments to generate immediate income. You can even combine all of this with growth stocks or mutual funds. The reality is that there is no one strategy that works for everyone.
At a minimum, when deciding between dividend vs. growth stocks, it depends upon your risk tolerance. It also depends on your goals and how close you are to retirement. Deciding what you prefer is a personal decision, and a conclusion you can only reach on your own.