Dividend vs Growth Investing: Which Is Right For Your Money?

Key Differences Between Dividend Investing And Growth Investing Explained

In this article, we will discuss dividend vs growth investing.

Because it’s important to understand and pick the right investment strategy for your situation. And stick with it over the long term.

By doing so, you choose a defined approach for investing. That helps guide your investment decisions.

Thus, allowing for good stock investments that align with your investment goals.

So, let’s get started…

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Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

Dividend Investing

First, for full disclosure, I’m a dividend growth investor. And have been for many years.

But, I’m not here to pound the table and say dividend vs growth investing is the best investment strategy. And you must invest in dividend vs growth stocks.

No, not at all. I want to present a balanced argument. Because what’s right for me. May not be right for you. After all, it’s your money!

On the other hand, I have to start somewhere. So, here goes…

What Is Dividend Investing?

In the broadest sense, dividend investing simply means buying and holding stocks that pay dividends.

Next, and getting more specific, a dividend investor will typically emphasize one or more of the following objectives…

First, receiving a consistent stream of dividend income from stocks right now.

Second, growing that dividend income stream larger and larger over time.

Third, realizing capital appreciation. From rising stock prices over the long term.

Many dividend investors seek to balance these 3 objectives by investing in dividend growth stocks. While others emphasize one objective over the other.

For example, an investor focused on creating the largest amount of dividend income right now. Will lean toward selecting stocks with high dividend yields.

On the other hand, an investor seeking a balance between current income, growth of that income, and capital appreciation. Would be more likely to choose stocks with lower dividend yields.

Furthermore, choosing lower dividend yields from companies with a strong growth track record. Of increasing the value of their dividends paid to shareholders each year.

Next, let’s look at some examples of dividend stocks that deliver on these objectives…

Examples Of Dividend-Paying Stocks

First of all, tobacco company Altria (NYSE: MO) is an example of a high dividend yield stock. That has lower growth prospects due to the decline in smoking.

By investing in Altria, investors earn high dividend income right away. But will likely sacrifice the potential for large dividend increases. In addition to the lesser likelihood for increases in the price per share.

Real estate investment trust stocks also fall into the higher dividend-yielding lower growth category. They are a popular choice by many dividend investors.

On the opposite end of the spectrum, we also have low dividend yield stocks. Apple (NASDAQ: AAPL), for example.

Apple’s dividend yield is typically less than one percent. But management increases the dividend rate per share every year. Often by 8-10%.

So, dividend investors seek out stocks like Apple for different reasons. Yes. They receive cash flow from dividends right away.

But, longer-term, Apple investors desire dividend increases and share price appreciation.

Finally, there are examples of many stocks that fall somewhere in between these two extremes.

With 3-5% dividend yields. Also, offering consistent increases to their dividend rate per share every year. A stock like PepsiCo (NASDAQ: PEP) comes to mind.

You can also identify and invest in dividend stock funds and ETFs. That pursue a dividend investing strategy.

The objectives of each fund will be different. Some will pursue high income. While others will pursue growth and dividend income. And you can find everything in between.

What To Look For In Dividend Stocks Vs Growth Stocks

Dividend investors will usually look at several key metrics. As they assess what dividend payers to add to their investment portfolio.

For example…

The stock’s dividend yield. The value of annual cash dividends an investor will receive. Expressed as a percentage of the amount invested.

Dividend growth rate. Represents the percentage rate at which management increases the dividend annually.

Dividend history. The length of time a company has been paying dividends. And for how many consecutive years the dividend has been increased.

Dividend Kings and Aristocrats are stocks with excellent dividend histories. They are a great place to start when building out a dividend portfolio.

The company’s dividend payout ratio. The value of a company’s financial resources paid to investors. In the form of dividends. Also expressed as a percentage.

Typically, a lower dividend payout ratio is better. Indicating a company can withstand difficult economic conditions. And continue to pay their dividend without interruption.

Next, let’s examine the pros and cons of dividend investments

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Advantages Of Dividend Investing Vs Growth Investing

1. Dividend stocks tend to outperform growth stocks in a bear market. Because the dividend yield rises as the stock price falls. Thus, providing support from further declines.

2. To receive cash from a dividend portfolio. There is no need to sell shares.

Dividends are passive income that you can do as you please with. And those dividends are particularly attractive when interest rates are low.

3. Dividends are taxed at lower tax rates. Versus income earned from your job. Known as ordinary income.

Finally, if dividend investing interests you. Then I suggest checking out the Simply Investing Report & Analysis Platform.

For selecting the best dividend-yielding stocks. And buying them at the best times. Simply Investing is an excellent tool.

Disadvantages Of Dividend Investing Vs Growth Investing

1. Although dividend payments receive preferential tax treatment. In the form of lower tax rates.

Taxes are due in the year in which dividends are received. Even if you reinvest the dividends back into the stock.

2. Companies aren’t required to pay dividends. So they can reduce or suspend their dividend payment at any time. Although the best dividend stocks rarely, if ever, do so.

3. Many dividend stocks are clustered in similar stock market sectors and industries. So, it can be more challenging to build a diversified investment portfolio.

Okay. Now that we know the basics of dividend investing

Growth Investing

It’s time to turn our attention to growth investing and growth stocks.

What Is Growth Investing?

Capital appreciation is the primary focus of growth investing.

That simply means buying a stock at one price. And expecting all investment returns to come from the stock price moving higher in the future.

Unlike value investing. Buying stocks that appear to be trading at a discount. Growth investors care less about stock valuation.

Thus, they will buy stocks that are expensive on a stock price to company earnings basis. And expect that the shares will become even more valuable and more expensive in the future.

Different than dividend investors, a growth investor does not care if a stock pays a dividend. And in many situations, they actually prefer a stock with no dividend.

Because by retaining all earnings, management can reinvest those financial resources back into the business. To grow more rapidly. Hopefully, increasing the stock price.

Examples Of Growth Stocks Vs Dividend Stocks

Here are some good examples of growth stocks vs dividend stocks. Neither of these 2 has paid a dividend to shareholders.

However, using the 5 years ending 2021, their share prices have risen rapidly.

Tesla (NASDAQ: TSLA). The stock price increased more than 20 times during that period.

Amazon (NASDAQ: AMZN). Shares were worth more than 4 times more after those 5 years.

And just like with dividend stocks, there are plenty of traditional mutual funds and exchange-traded funds. That focus on investing in growth stocks.

What To Look For In Growth Stocks Vs Dividend Stocks

Growth investors emphasize different characteristics vs dividend investors. When choosing their investments.

Such as…

Rising revenues. It’s virtually impossible to grow the value of a stock without a rapidly rising revenue stream. Or, the prospects of one soon.

Increasing profits. Earnings are the best fuel for growth stocks. Because eventually a rising stock price must be backed by profits.

Increasing capabilities. Even without revenues or profits, growth in future capabilities can drive growth stock prices higher.

For example, Amazon was unprofitable for many years. As it built out its technology and distribution infrastructure.

Capable and trustworthy management. After investing money in a growth stock, you are trusting management. To invest wisely in profitable growth initiatives that will increase the price of the stock.

Next, the plusses and minuses of growth investing…

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Advantages Of Growth Investing Vs Dividend Investing

1. Opportunity for very high returns on investment.

2. Growth stocks tend to outperform during good economic times. And when the stock market as a whole is rising.

3. Unless you sell your shares, no income tax is ever due on the unrealized capital appreciation.

Finally, if growth stocks interest you. Then I suggest checking out the Motley Fool Stock Advisor.

For identifying growth-oriented stocks. And the best times to buy them.

Disadvantages Of Growth Investing Vs Dividend Investing

1. Selling shares is the only way to realize your return on investment.

Until then, it is just “paper profits”. And those profits can be taken away quickly by a falling stock price.

2. Growth stocks tend to underperform during difficult economic times. And during bear markets.

Because it’s harder to grow during a recession, and there is no dividend paid to provide support for the stock price.

3. Sometimes management won’t make the best investments. Thus, putting a damper on the stock price.

Worst yet, investors won’t have any dividend payments. In return for their commitment of funds to the company.

Okay. That concludes my review of dividend investing vs growth investing.

So, allow me to conclude with a few parting thoughts…

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Dividends Or Growth: Which Is Right For You?

When debating dividend vs growth investing, most advisors suggest investors with long time horizons. And higher tolerance for investment risk. That growth stocks are the better choice for higher long-term total returns.

On the other hand, as you get closer to retirement. And are looking to supplement your income with dividends. While reducing investment risk. Then dividend stocks are the better way to go.

But, there is no right or wrong answer here. For example, I started investing in dividend vs growth stocks at a young age. And I am happy that I did.

Furthermore, it’s not an all-or-nothing choice. Because you can allocate a share of your investments to dividend-paying stocks. And another share to growth stocks.

Then as your circumstances change. Fine-tune your portfolio allocations as you see fit.

In the end, the most important thing to do is pick an investment strategy. And stick with it.

Because the earlier you start investing, the more time your money has to grow and compound. Since time is your best friend when it comes to investing. No matter what strategy you choose.

Okay. That’s all for now. And if you are hungry for more? Then check out all of our…

Informative Articles on Dividends and Dividend Investing

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Author Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.

Dividend Vs Growth Investing Explained