Here’s a quiz to test your knowledge of dividend investing vs. growth investing. The answers should help you determine the best stocks to hold for long-term portfolio gains

For a true measure of stability, we think most investors should focus on stocks that pay a dividend they’ve maintained or raised 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.

Meanwhile, growth investing tries to identify and buy rising stocks when they have further growth ahead. Growth stocks 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, and could keep growing for years or decades.

In reality, though, there is no reason to decide between dividend investing vs. growth investing. They do not need to compete with one another, and in fact, can work together.

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 A. Dividend investing vs. growth investing: Both investment strategies can work together if…

1. You include some growth stocks that pay a dividend.
2. There is a focus on steady gains with lower risk over time.
3. There are higher-than-average growth rates exhibited by some of your dividend stocks.
4. All of the above.

You are correct if you answered 4.

Growth stocks, by their very definition, can be a part of any Successful Investor stock portfolio focused on steady gains over time. The key is to discover the stocks that will grow at higher-than-average rates within their industries, or within the market as a whole, for years or even decades.

A dividend growth investing strategy looks for growth stocks that also pay a dividend, which is less common than with, say, value stocks. The best growth stocks can offer above-average gains, and the dividend just adds to their appeal.

 B. Many growth stocks involve companies that will _________ instead of paying a dividend:

1. Re-invest their cash flow to promote growth
2. Give the money to their employees
3. Give the money to charity
4. None of the above

You are correct if you selected 1.

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.

C. True or False? Growth stocks are the same as momentum stocks.

You are correct if you answered false.

It’s very easy to confuse growth stocks with momentum stocks. Like growth stocks, momentum stocks often move up faster than the market averages. But momentum stocks attract a different kind of investor. Growth-stock investors are in for the long haul, while momentum investors aim to profit from short-term trades. Momentum investors are particularly keen to jump in on a so-called “positive earnings surprise.” That’s when a company outdoes brokers’ earnings estimates.

The trouble is that when the stock’s rise wanes, momentum investors also try to get out as a group. But there are never enough buyers to accommodate them. That can lead to big fluctuations in the stock’s price.

 D. Ways to reduce the risk of a growth investing strategy include…

1. Being skeptical of companies that mainly grow through acquisitions.
2. Avoiding overindulging in highly aggressive investments.
3. Keeping an eye on the growth stock’s debt.
4. All of the above.

You are correct if you answered 4.

Making acquisitions can speed up a company’s growth, but it also adds risk that can undermine a conservative, safe investing approach. Great acquisitions are rare finds. Many acquisitions come with hidden problems or risks, or they turn out to have been over-priced.

Despite the risks, some acquisitions turn out 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.

Aggressive stocks can give you bigger gains than more conservative stocks. But they also expose you to a greater risk of loss. That’s why we recommend limiting your aggressive holdings to a small part of your overall portfolio.

Furthermore, debt should be manageable. When bad times hit, debt-heavy companies go broke first. This is one of the best ways you can mitigate risk in your own growth investing strategy.

 E. Dividend investing vs. growth investing: Top dividend stocks can boost your returns if they…

1. Have strong positions in healthy industries.
2. Feature hidden assets.
3. Operate well-established businesses.
4. All of the above.

You are correct if you answered 4.

The top dividend-paying stocks to invest in have strong positions in healthy industries. They also rely on strong management to make the right moves to keep them competitive in changing marketplaces.

A track record of dividend payments is a strong sign of reliability and a sound indication that investing in the stock will be profitable for you in the future.

Always follow our three-part Successful Investor approach when buying both growth and dividend stocks to make the best selections

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

To what extent does the volatility of growth stocks worry you?