Dividend Stocks vs. Growth Stocks
What is a Dividend Stock
Dividend stocks are companies that pay their shareholders a cash dividend just for owning shares. Instead of reinvesting profits into growing their revenue, dividend stocks pass the gains along to the shareholders.
Companies that pay consistent dividends are often blue-chip stocks with reliable business models. Consumer staples stocks are a great example because people will still buy their products regardless of how the economy is doing.
Dividend stocks are excellent for investors seeking a consistent passive income portfolio. While you aren’t going to get rich overnight by buying dividend stocks, you will see your portfolio grow consistently over time.
What is a Growth Stock?
A growth stock is a company expected to grow its earnings and revenue faster than the market average. Growth stocks would rather grow their revenue than pay a cash dividend to the shareholders.
Since growth companies usually don’t pay dividends, the only way for investors to make money is to sell the company for a higher price than they paid.
Growth stocks are best suited for investors looking to take more risk for more reward. If the growth stock you pick fails to perform, you will likely lose money on the investment.
Pros VS Cons of Dividend Stocks
Dividend stocks are great for investors seeking passive income with low volatility. However, there are always pros and cons associated with investment choices you must understand.
Pros
Consistent income, regardless of the stock price
Stable and less volatile than growth stocks
Cons
Dividends are taxed immediately
Low capital gains growth
Pros VS Cons of Growth Stocks
Growth stocks are an excellent choice for your portfolio if you seek a high return in exchange for increased volatility. While your portfolio balance will look like a rollercoaster, the return potential is massive when you invest in growth companies.
Pros
Potential for high capital gains returns
Low capital is required to make a lot of money
Cons
High risk potential
Growth companies can easily fail or go bankrupt
Are Growth Stocks Risky?
The main risk of investing in growth stocks is that the company’s earnings stop increasing faster than the market. So if you pick a company that stops performing well, you may be forced to sell it at a loss and find a better growth company.
However, a safer way to invest in growth stocks is to purchase a growth ETF. Growth ETFs give you exposure to a basket of growth stocks to reduce your single-company risk.
Additionally, if a company within the ETF stops performing well, the fund will remove it and replace it with a better company for you.
Misconceptions About Dividends
Growth investors argue that dividends don’t benefit the shareholders since the stock price will fall to match the dividend payments.
In other words, when a dividend stock pays you, the cash value on the company’s financial statements decreases, negating the payment in the first place.
However, dividend stocks perform well because investors believe the company will continue to pay dividends for years.
The same argument can be made for growth stocks since the positive revenue growth is essentially already priced in due to the elevated P/E ratio and share price.
Can a Dividend Stock be a Growth Stock?
Yes, companies on the stock market fall under the definition of both a dividend and growth stock. Microsoft is an excellent example since its revenue increases yearly, and it pays a dividend.
Dividend growth stocks are slightly different, as these stocks focus on increasing their dividend payment rather than revenue or earnings.
Dividend Stocks vs. Growth Stocks: Which Should You Pick?
The investments you pick for your portfolio depend on your overall investment goals and time horizon. Additionally, you can create various portfolio compositions depending on your risk tolerance.
For example, if you want your portfolio to be stable but have some chance of reaping significant rewards, you can invest 80% into dividend stocks and 20% into growth stocks.
On the other hand, if you want to take more risk but not with your entire portfolio, you can invest 80% into growth stocks and 20% into dividend stocks.
You can also invest in growth or dividend ETFs instead of picking single companies. The portfolio variations are endless with all the financial products available today.
Final Thoughts: Dividends or Growth?
Nobody knows if growth or dividend stocks will perform better in the next ten years. When the stock market is performing poorly, everybody turns to dividend stocks since growth gets crushed in turmoil market conditions.
On the other hand, when the market is bullish, growth stocks are flying, and nobody wants to earn little returns with passive income dividend stocks.
Therefore, the most crucial factor to consider is where your conviction lies. The most significant risk in the stock market comes from panic selling your investments at the wrong times, such as when the market falls.
If you can’t stomach seeing your portfolio drop over 70% during bear markets, you probably shouldn’t invest in growth stocks. Additionally, if you don’t completely understand a company, you are better off investing in ETFs to avoid investing in a poorly performing company.
Studying history and preparing for the worst-case scenario makes you much less likely to make a costly decision. Stock market crashes are nothing new, yet when they happen, retail traders rush to get rid of their investments.
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As Always: Buy things that pay you to own them.
-Josh
Blog Post: #070
