Dividend stocks and growth stocks are often pitted against one another as an either-or option when building an investment portfolio.
From one perspective, we hear about the importance of building a portfolio of income-producing assets, such as dividend stocks, particularly for investors nearing retirement. Dividend stocks appeal to many investors as a safe option for supplementing their portfolio with a steady and reliable income stream, which can be comforting during market turmoil and elevated economic uncertainty.
Conversely, growth stocks are appealing and exciting because they provide a more significant return potential, though not without inherently more risk. The idea of relying on anticipated but not guaranteed growth for a return on investment is enough to make some investors run. Still, the potential for capital appreciation keeps other investors seeking promising portfolio prospects.
Dividend stocks often get the spotlight during market downturns when investors turn to safety and stability, while growth stocks steal the show during economic expansions. With that said, wouldn’t it be more beneficial for investors to embrace a both-and strategy rather than an either-or mindset while building a well-diversified portfolio?
Exploring the Characteristics and Examples of Dividend Stocks and Growth Stocks
Before making any investment decisions, you should have a solid understanding of what you’re investing in. Let’s take a moment to explore what sets dividend stocks and growth stocks apart by uncovering their unique characteristics and highlighting a few examples of each.
Dividend Stocks
Dividend stocks regularly distribute a portion of a publicly traded company’s earnings to investors in the form of cash or stock. For example, if a company pays a dividend of 10 cents per share, an investor with 1,000 shares would receive $100 in cash. On the other hand, a stock dividend is a payment to investors in the form of additional shares. In this case, if a company pays a 10% stock dividend, an investor with 1,000 shares would receive an additional 100.
Since the tech boom of the 90s, dividend stocks generally don’t appreciate in value as quickly or steadily as growth stocks, but growth may still happen. Therefore, adding dividend stocks to your portfolio may provide both income and capital appreciation over time.
Dividend-paying companies tend to be well-known and well-established, adding another layer of comfort for investors. Moreover, investors may feel confident investing in a financially healthy company since dividends are sourced from retained earnings. Some prominent dividend payers include Johnson & Johnson, Exxon Mobil, Procter & Gamble, and The Coca-Cola Company.
It’s not surprising that dividend stocks have become a staple in many portfolios; however, focusing exclusively on dividend stocks could result in missing out on the potential wealth-building capabilities of growth stocks.
Growth Stocks
Growth stocks are stocks of publicly traded companies that anticipate their earnings to continue growing at a rate that tops the market average. These are typically newer companies or companies in growth sectors, such as technology or pharmaceutical, with substantial and rapid growth potential. These companies usually reinvest earnings back into the company to generate more profits, which can drive up share prices, instead of paying dividends to investors.
Growth stocks tend to carry more fluctuation risk, which may be intolerable for some investors. Investors risk missing out on potential profit if they sell their stock too early or too late since profits (or losses) are only realized once the investment is sold. Still, many investors who ride out periods of volatility have experienced considerable capital appreciation in their portfolios.
Amazon, Google, and Tesla are classic examples of growth companies that have heavily invested in product research and development to stay on top of the innovation race. Early investors in these companies have seen a sizable increase in the value of their investments, but not without fluctuation along the way.
Investing in growth stocks can be an exciting and massive wealth-building opportunity for those willing to stomach the risk. Though as attractive and compelling as growth stocks can be, it’s essential to avoid getting too absorbed by flashy growth characteristics when building your portfolio.
Dividend vs. Growth Stocks: Which Is the Better Buy?
In our opinion, both dividend and growth stocks are essential in any portfolio. There are cycles and conditions where one may outperform the other, but both are important to improving your portfolio’s income and growth potential.
So instead of asking, “Which is the better buy?,” a more relevant question to consider is, “What is my ideal exposure to each?”
Many factors influence your allocation, and there is no one-size-fits-all approach. Let’s take a look at a couple of examples:
- Age: Younger investors have more time to recover from market setbacks or bad investments. Therefore, many are willing to forgo a heavily income-focused portfolio to invest in growth stocks. However, investors nearing or in retirement may prioritize capital preservation and income generation while reducing their exposure to growth stocks.
- Risk Tolerance and Capacity: While age is undoubtedly an essential factor to consider, it doesn’t automatically mean you should have more or less exposure to dividend or growth stocks. Some younger investors can’t stomach a steep decline in their portfolios and choose to invest more conservatively. In contrast, some more seasoned investors have weathered the ups and downs of the market and are comfortable taking on more risk.
Risk capacity is equally important to consider. For instance, a significant loss of capital may not affect the lifestyle of a higher net-worth investor, which gives them the ability to take on more risk regardless of age.
Since every investor’s journey is unique, adopting a holistic approach is crucial to determine an appropriate allocation. Your exposure to various investments will undoubtedly shift as you enter new stages of life with unique goals for that season, but the message remains the same: both dividend stocks and growth stocks have a place in your portfolio.
Laying the Dividend Stocks vs. Growth Stocks Debate to Rest
It’s worth noting that dividend and growth stocks aren’t the only components of a well-diversified portfolio, but both are key players. They may each have their time to shine during various cycles of the economy and market, which is why it’s important to diversify across both rather than favor one over the other.
After all, a principle of building and preserving wealth is not to concentrate solely on what seems safe or exciting but instead to diversify and get exposure to many parts of the market in such a way that is in alignment with your risk profile and goals.
If you’re interested in discussing your financial goals and reviewing your investment strategy to determine if you’re on the right track, we’d love to get in touch. Give us a call at 877.333.1015, email us at info@fivepinewealth.com, or visit our website to learn more about how we can help.
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