Growth Stocks With Dividends Are A Powerful Combination
To continue our series on frequently asked questions about dividends. Today, I’d like to address the question: do growth stocks pay dividends?
First, I will give you the answer in brief. Then provide examples of the best growth stocks with dividends.
Finally, we will close out with 5 reasons why the management of these and other growth companies choose to pay dividends to shareholders.
That’s the plan. So, let’s get moving…
Do Growth Stocks Pay Dividends?
Growth stocks typically do not pay dividends.
Rather, company management chooses to use its financial resources to fund internal investments. Thus, believing these investments will increase capabilities and produce higher revenues, increased profits, or both.
As a result, driving the company’s share price higher and producing capital gains. Which is one of the primary reasons investors buy growth stocks.
However, there are exceptions to this general rule of thumb. Because some growth stocks pay dividends. And do so for a variety of very good reasons.
In a moment, I will provide several examples of growth stocks that pay dividends. But first, a couple of definitions to set the stage…
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
What Is A Growth Stock?
Growth stocks are shares issued by companies expected to grow sales and earnings rapidly. Producing growth at a faster rate than the average publicly traded company.
Furthermore, the growth is generated by making smart internal investments. Specifically, investments in facilities, equipment, production capabilities, research and development, technology, and people.
In turn, the rapid sales and earnings growth is expected to result in a rising share price. Generating capital appreciation that is much greater than the stock market as a whole.
What Is A Dividend?
First of all, a dividend is a distribution of economic value. They are distributed by a company to the owners of its stock.
Furthermore, dividends are almost always paid in cash. However, they can be made from other assets with economic value.
What Is A Dividend Stock?
Next, understand that stocks paying regular dividends are often referred to as dividend stocks.
While companies that increase their regular dividends annually are referred to as dividend growth stocks.
Most noteworthy, some dividend growth stocks have earned the right to be called Dividend Aristocrats. By paying a higher dividend rate per share every year for at least 25 years in a row.
Finally…
Why Growth Companies Do Not Pay Dividends?
Growth companies tend not to pay dividends because they consume cash.
Cash that could otherwise be invested internally. To produce higher sales and profits.
However, as I mentioned earlier in answering the question: do growth stocks pay dividends? We know that some of them do.
So, allow me to provide some examples…
3 Examples Of Growth Stocks That Pay Dividends
Each of these companies produced revenue growth of at least 10% annually over the 10 years ending in 2021. This is more than twice the revenue growth rate of the S&P 500 companies during that time.
Additionally, each of these example companies is highly profitable. Operating proven business models. Thus, rapidly growing revenues also translate to fast increases in earnings.
Finally, each stock appreciated significantly more than the S&P 500 stock index for the 10 years under review. Producing some outstanding capital gains for the growth investor.
For example, by establishing equal positions in each of these 3 stocks starting at the beginning of 2012. And holding for 10 years until the end of 2021.
Then…
An investor would have earned approximately 25% average annual capital gains. Trouncing the roughly 14% increase in the S&P 500 share price.
Drumroll, please!
Here they are. Stocks like this have helped many investors achieve their most important dividend investing objectives.
3 Best Growth Stocks With Dividends
- Apple (APPL)
- Microsoft (MSFT)
- Starbucks (SBUX)
As a result, they are all growth companies with growth stocks that pay dividends. All have been excellent investment ideas producing great returns for retirement investors.
Or any type of investor, for that matter.
Full Disclosure: I currently own Microsoft and Apple. And have owned them for many years. On the other hand, I do not own Starbucks. I should have bought it, but never did.
Ouch! I hate it when that happens.
This leads me to an important point. How to find stocks like this…
How To Find Growth Stocks That Pay Dividends
Every investor would like to buy and hold good stocks that go up in value. And do so significantly faster than the overall stock market. While earning a dividend on top of it.
So, how do you go about making that happen?
Well, first I think it takes experience and some good intuition to identify these stocks. Nothing beats your knowledge about market trends and the companies positioned to capitalize on them.
This comes from staying abreast of business and stock market news. Just being an observant consumer. And getting your hands dirty as a DIY investor.
Beyond that, it’s important to have access to the right tools and resources. For this, I like the following…
The first is the Motley Fool Stock Advisor.
For expert stock recommendations delivered to your inbox every month. Backed by an excellent long-term track record.
And second, is the Simply Investing Report and Analysis Platform.
For all the latest metrics on dividend stocks. Plus recommendations on the best stocks to buy and when to buy them.
So, there is no need to fly blind. Find the right tools, do your research, and your investment returns should benefit.
Of course, there is no guarantee. The past performance of the 3 stocks I highlighted doesn’t guarantee future results.
So, do your homework. And understand the investment risk you are taking.
Because stocks can and will go down. Sometimes by a lot. After all, it’s your money.
5 Reasons Why Growth Companies Pay Dividends
Do growth stocks pay dividends? Yes. We know by now that some of them do.
But then, we should better understand why companies that focus on growth, pay dividends.
Well, I can think of several reasons…
Attract A Wider Group Of Investors
Stock prices are subject to the laws of supply and demand. Meaning the more demand there is for a company’s shares, the higher the stock price.
Some investors, like me, will only invest in good stocks that pay dividends. Similarly, many mutual funds and exchange-traded funds require dividend-paying stocks to buy and hold.
So, by paying dividends, growth companies can open up their shares to a larger array of the investor population.
Provide Underlying Support For The Stock Price
A solid and safe dividend. That is expected to be paid well into the future. Will provide support to the stock price.
How so? You might be asking.
Well, in times of stock market stress. When stocks are going down. And going down by a lot. A stock’s dividend yield rises.
Because dividend yields have an inverse relationship with stock prices. And higher dividend yields are attractive to investors.
So, current investors are more hesitant to sell out. And new investors will buy the stock at the time. Because of its higher dividend yield.
Profitable Internal Investments Are Limited
You may have noted something in today’s examples of dividend and growth stocks. Specifically, each of these three companies has been around for a while.
Therefore, they are not early-stage or start-up companies. No, they are mature companies. Operating in proven markets.
And as companies and their markets mature. What happens is the number of good investment opportunities becomes more limited.
For example, there are only so many more stores that Starbucks can open. And only so many more smartphones Apple can sell to people who do not already have one.
As a result, financial resources. And specifically, cash, become available. For what?
Paying dividends!
Excess Cash Flow Is Available
Another thing that growth stocks with dividends have in common is cash. Because their businesses are so profitable they generate more cash than they physically and effectively get invested.
Because they are cash-rich businesses. A wonderful luxury to have.
Since internal investments take time and people to identify, plan, manage, and implement. So, even if good investments are available. The resources may not be in place and available to execute them effectively.
Thus, excess cash can build up and sit on a company’s balance sheet. Earning a small interest rate versus a better potential return.
When this is the case, investors get anxious. Saying, if you can’t get the cash invested. Return it to us, the owners of the company, by paying a dividend.
As a result, how do growth stocks pay dividends? With the ample excess cash they generate. But do not have the ability to invest internally.
Industry Competitors Pay Dividends
Why do growth companies pay dividends? Here’s an important reason…
Just like companies compete for the same customers. They also compete for a limited amount of investors and investment dollars.
So, when all else is equal between two competing growth companies. Many investors will choose to invest in the one that pays a dividend.
Why would you not? When the potential for stock price appreciation appears to be similar.
Just like any other business area, companies analyze what their competitors are doing. And try to match them or beat them.
Paying dividends and producing a solid dividend growth rate for investors is no different.
Okay. That completes our 5 reasons why growth companies may choose to pay a dividend.
So, allow me to wrap up with a few parting thoughts…
Do Growth Stocks Pay Dividends?
Yes, growth stocks pay dividends. But it is more the exception than the norm.
Generally, when you find a good growth stock with a dividend you will find…
- A business that generates a lot of cash
- The company and its markets are maturing
- Internal investment options for cash are diminishing
- Competitors in the industry also pay dividends
Finally, you know by now that investing in these types of stocks at the right time. Can and will generate handsome returns on investment.
Okay, that’s all for today’s article. Before you go, check out all of our…
Dozens of Dividend Investing Articles
…neatly organized for your reading pleasure in our robust archives.
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.