Investing in stocks can be a bit tricky, especially when deciding between dividend stocks and growth stocks. Many people find themselves unsure about which type to go for, especially with the buzz around big gains in stocks like the FAANG group. This can lead to a fear of missing out on these popular options. So, what’s the best choice? We’ve put together a portfolio focused on high-quality dividend growth stocks that offer consistent income over time. We believe this is a solid strategy for long-term investing.
Now, should you go for dividends or growth? Well, both have their merits. Imagine if you could combine them—this is where dividend growth investing comes in.
Let’s talk about what a dividend stock is. Essentially, it’s a stock that pays you a portion of the company’s profits, usually in cash, though some pay out in additional shares—commonly referred to as stock dividends or splits. Holding these stocks means you not only own a part of the company but also earn money from it, which can increase your overall profit.
On the other hand, growth stocks are those that belong to companies with anticipated earnings growth that outpaces the market average. These stocks typically don’t pay dividends since the companies prefer to reinvest earnings back into growth. These can be riskier, with prices that might swing considerably if earnings don’t meet expectations.
Why choose dividend growth investing? It’s important to consider the actual business when buying any stock, not just its current price. If you’re into dividend investing, there are ways to ensure your dividends are secure. I recently read an intriguing viewpoint on this topic from a finance expert named Sam, who suggests that young investors might benefit more from focusing on growth stocks when the economy is buoyant.
For younger investors, it could be more advantageous to focus on growth stocks, as they might yield higher returns over time. Sam points out that it takes substantial capital to earn significant income from dividends—a $500,000 portfolio yielding 3% only brings in $15,000 annually. For those on an average salary, saving up such an amount could take years.
Despite this perspective, there are examples of stocks that have transitioned successfully into dividend payers after years of growth, like Couche-Tard and Starbucks. Both started paying dividends after proving their growth stability. This indicates management’s confidence in their profits and offers a blend of stable returns for long-term investors.
Why do companies pay dividends? Often, it’s when management believes they’ve exhausted productive avenues for reinvesting their earnings. This isn’t necessarily bad; it allows shareholders to allocate these funds elsewhere, rather than risking poor reinvestments by the company.
Investors aiming for more growth might steer clear of steady but slow dividend payers like AT&T and instead look at companies that demonstrate both reasonable pricing and growth potential. Timing is crucial in investing, especially when deciding on buying or selling growth stocks, which generally involves more active management than dividend stocks.
Experience matters a lot in deciding where to invest. New investors, especially younger ones, could sometimes chase high-growth opportunities only to find themselves in challenging positions if these stocks dip significantly. It’s crucial to establish clear criteria and remain disciplined regardless of the stock type you choose.
Instead of sticking strictly to the “buy and hold” strategy, keeping an eye on your investments regularly is essential. This advice applies across the board—whether you’re focused on dividend or growth stocks.
In today’s market, although difficult to start with just dividend investing, combining it with value investing can be a learning opportunity. New investors can gradually familiarize themselves with the process while collecting dividends and later branch into growth stocks. Alternatively, you could reinvest the dividends from your portfolio into growth stocks, allowing you to blend both strategies effectively.
With dividend growth investing, you essentially get the advantages of both world—income and growth. You can use tools like a dividend discount model to forecast growth and better plan your investments. Are you leaning towards dividends or growth in your investment journey? Share your thoughts or questions!