The Investor's Dilemma: Dividend vs. Growth Stocks
In this edition
1. What are dividends?
2. Dividend vs. Non-dividend stocks
3. Both styles can be successful
4. What type of investor should I be?
5. Investors believe they are stable
6. Risks with dividends
7. Boeing’s dividend cut
8. Conclusion
On Wall Street, the fight over dividend stocks versus non-dividend or growth stocks has been going on for decades. Ultimately, the choice usually comes down to your investing preferences and what you can live with (your risk tolerance). Although this topic won't be resolved in this article, it does explore it and goes into detail about dividends, their various qualities or benefits and negatives, if they are actually steady, and certain hazards associated with the dividend plan.
What are dividends?
Companies can distribute money in the form of dividends to their shareholders as a method to distribute a portion of their profits. A corporation has the option to distribute some of its excess earnings as dividends to its shareholders when those earnings are greater than what is required for expansion or reinvestment. Investors who own firm shares are rewarded with these dividends, which give them a cash return on their investment. Oftentimes, you’ll find that dividends are distributed on a regular schedule, such as quarterly or annually. They are frequently stated as a fixed dollar amount per share or as a percentage of the stock's market price (dividend yield). They play a crucial role in attracting and retaining investors, particularly those seeking stable income streams from their investments.
Dividend vs. Non-dividend stocks
The choice between investing in a dividend-paying or non-dividend-paying stock depends on your financial goals, risk tolerance, and investment strategy.
Dividend-Paying Stocks
Investors looking for a reliable income stream may find investing in dividend-paying equities to be appealing. For people who depend on stocks for income, such as pensioners or investors wishing to take cash out to reinvest in the same stock or other ones, dividends provide a regular cash flow. Dividend stocks are frequently linked to more seasoned, mature businesses that produce consistent earnings. High dividend yields, however, may imply less growth potential since companies that devote a substantial amount of their earnings to dividends may not have as much money available for reinvestment and growth.
Non-Dividend-Paying Stocks
Choosing non-dividend-paying companies can make sense if your priorities are long-term growth and capital gain. Many startups and tech companies spend their profits back into the company to support growth and innovation. By forgoing dividend payments, these businesses can devote more funds to R&D and market expansion, which could eventually result in higher stock values. Buying companies that don't pay dividends can be riskier because the gains depend on the company's capacity to increase in value and may not generate income immediately.
Ultimately, the decision should align with your investment objectives. If you're looking for steady income, dividend-paying stocks could be suitable. If you're more interested in potential capital gains and are comfortable with a potentially higher level of risk, non-dividend-paying stocks might be more appealing. Diversification is also key; a balanced portfolio might include a mix of both types of stocks to achieve a blend of income and growth potential.
Both styles can be successful.
The above graph shows the 5YR return of the Vanguard Russell 1000 Growth Index Fund (VONG) and the Vanguard Dividend Appreciation Index Fund (VIG).
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