Topic: Dividend Stocks

Dividend vs Growth Investing: How to use both to arrive at higher returns

November 12, 2024|by Scott Clayton

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Dividend vs growth investing: Smart investing should include both strategies for maximum gains.

Growth investing tries to identify and buy rising stocks when they have further growth ahead. Often these stocks forgo paying dividends in favour of investing all their cash flow in growth. Dividend investing, on the other hand, focuses on companies that pay dividends, and will likely continue to do so in the future. Growth investing may lead to dividends, but it isn’t a guarantee.

Here’s a look at dividend vs growth stocks, and how you can utilize both in a well-diversified portfolio.

Dividend vs growth investing: Dividends are a key sign of investment quality

Dividend stocks are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers at all times. As you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.

We look for dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc. to suit themselves. Minor firms can’t do that.

One of the best ways of picking a quality dividend stock is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings, issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one thing that all the best dividend stocks have in common.

Above all, for a true measure of stability, focus on stocks that have maintained or raised their dividends during economic or stock-market downturns. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth.

When comparing dividend vs growth stocks, it’s essential to consider your investment goals and risk tolerance.

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Dividend vs growth investing: To profit from growth stocks, you need to pick stocks with clear prospects

By definition, growth stocks are companies that have above-average growth prospects. They are firms whose earnings growth has been above the market average, and is likely to remain above average. It is often the case that they pay small dividends or none at all. Instead, they re-invest their cash flow in the business, to promote their growth.

Although these stocks can be highly volatile, they often make good long-term investments. They may be well-known stars or quiet gems, but they do share one common attribute: they are growing at a higher-than-average rate within their industry, or within the market as a whole, for years or decades.

Growth by acquisition can add to a company’s risk. Despite the risks, however, some acquisitions turn out to be hugely profitable. So, your growth investing strategy shouldn’t automatically discount companies that have grown through acquisitions. Just keep the risks in mind, and avoid companies that seem unaware of them.

Dividend vs growth investing: 3 ways to make growth investing work for you 

1. The best growth stocks should have the ability to profit from secular trends. These trends outlast ordinary business booms and busts, because they reflect ongoing social change. Rising environmentalism is just one example of a secular trend.

2. We’ve already touched on the risk of using acquisitions as a growth strategy. It’s important to remember that while those purchases can speed up a company’s growth, the added risk can undermine a conservative, safe-investing approach. Great acquisitions are rare finds. Many acquisitions come with hidden problems or risks and they often turn out to have been over-priced.

3. Look for growth stocks that have ownership of strong brand names and an impeccable reputation. Customers keep coming back to these businesses and will try their new products.

Stocks paying high dividends are a big part of a successfully portfolio

If you stick with top quality stocks paying the highest dividends, the income you earn can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.

Understanding the differences between dividend vs growth stocks is crucial for building a balanced investment portfolio.

In summary, the debate between dividend vs growth stocks is a crucial consideration for investors seeking to build a well-rounded portfolio. Dividend investing focuses on companies that consistently pay dividends, offering stability and regular income. These stocks are often associated with established companies and can be less volatile, making them attractive for risk-averse investors or those nearing retirement. On the other hand, growth stocks are characterized by their potential for rapid expansion and above-average earnings growth. While they may not pay dividends, they offer the possibility of significant capital appreciation.

Both strategies have their merits and can complement each other in a diversified portfolio. Dividend stocks provide steady income and can act as a hedge against market volatility, while growth stocks offer the potential for substantial long-term gains. The key is to balance these approaches based on individual investment goals, risk tolerance, and time horizon. By incorporating both dividend and growth stocks, investors can potentially maximize returns while managing risk. Ultimately, a successful investment strategy often involves a thoughtful combination of both dividend and growth stocks, tailored to an investor’s specific financial objectives and market outlook.

Do you think younger investors should opt for growth investing and those over 45 should stick to dividend investing?

Do you try to prefer dividend or growth stocks, or a bit of both?