Dividend vs. Growth Stocks: Which Are Better?
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Investing in stocks is a great way to build wealth and achieve financial freedom. However, it can be difficult to know which investment strategy is right for you. Dividend stocks and growth stocks are two of the most popular strategies for stock investors, but they involve different risks and rewards.
Understanding the differences between these two types of investments is crucial in choosing an approach that fits your financial goals and risk tolerance.
Both offer potential returns but involve unique risks and rewards depending on market conditions, company performance, individual investor needs, and more. In this article, we’ll discuss dividend vs. growth stocks so you can decide which strategy will work best for you.
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Growth stocks can potentially give investors a higher return than the overall market. These stocks tend to be those of companies that are growing rapidly, such as those involved in new technologies or industries.
Investors often purchase growth stocks because they anticipate the company’s earnings and stock price will rise faster than the overall market average. This strategy differs from investing in the market through an S&P 500 ETF or an index fund.
The potential rewards from investing in growth stocks can be high, but these investments also come with higher risks. Some of these companies have yet to establish a reliable track record for success, and their stock prices can be volatile due to changing market conditions.
Additionally, some of these companies may never reach the level of success investors expect, leading to disappointing returns. And those that do well may not see continued or constant growth.
Investing in growth stocks is an appropriate strategy for those comfortable with higher risk levels in exchange for potentially greater rewards.
This type of investment strategy works best when markets are bullish and there’s an expectation that a particular sector or industry will continue to grow.
This type of investing also requires understanding when it’s wise to buy and sell certain stocks and ongoing research into potential investments to identify and capitalize on opportunities before they’re gone.
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Examples of Growth Stocks
Examples of growth stocks include Amazon (AMZN), Apple (AAPL), Alphabet (GOOGL), and Tesla (TSLA). These companies have seen their stock prices grow substantially over the years, as they’ve typically outperformed the overall market.
Of course, the companies mentioned above are all household names. There are also many growth stocks that the average person may not be familiar with. These are often smaller companies that have the potential to grow significantly in a short period. These companies often offer the highest potential, although the risk is also greater.
When a publicly-traded company earns a profit, it can reinvest that money to grow faster or pay dividends to shareholders. Growth stocks typically don’t pay dividends to investors because these companies are focused on growing as fast as possible. Other companies will use a portion of their profits to pay dividends to shareholders.
The companies that pay dividends are often considered more stable investments. These companies are mature and established, with reliable earnings based on decades of successful operations. They’re usually not as susceptible to economic downturns or turbulence in the stock market.
Of course, the share prices of dividend stocks can (and do) go down sometimes, but these drops are usually not as significant as those experienced by growth stocks. For this reason, investing in dividend-paying stocks is considered a lower-risk strategy than investing in the market as a whole or growth stocks.
The primary benefit of dividend investing is that it can provide a steady income stream over time. Most dividend stocks pay quarterly dividends, although this can vary from one stock to another.
The passive cash flow makes them an excellent option for those seeking a lower-risk investment strategy and steadier returns than other types of investments, like growth stocks. Dividends can become a significant source of income, and retirees can even live off dividends with a large enough portfolio.
Dividend stocks can also appreciate over time, increasing total returns. While they’re not as likely to experience the same levels of growth as growth stocks, they typically rise in value when the market is doing well. Additionally, the dividends can help offset any losses during bear markets.
It’s also important to note that dividends can be reinvested rather than taken as cash. For example, if you use an online broker like Public that offers a dividend reinvestment plan (DRIP), you can elect to have dividends automatically invested to buy more shares. This is ideal for dividend investors who currently don’t need the income or cash flow. Reinvesting will allow you to own more shares and ultimately collect more dividends in the future.
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Examples of Dividend Stocks
Some examples of dividend stocks include Johnson & Johnson (JNJ), Coca-Cola (KO), ExxonMobil (XOM), and Procter & Gamble (PG).
These are all long-term, established companies that have paid dividends for decades. They may not experience the same levels of growth as some of the more volatile technology stocks, but they’re generally considered stable investments.
See our Dividend Aristocrats list for more examples of companies with long histories or dividend growth. These companies with consistent dividend yield increases can be an excellent place to start.
Advantages of Growth Stocks
- Potentially greater returns
- Potential to outperform the overall stock market
- Potential for quick growth
Advantages of Dividend Stocks
- Provide a steady stream of income (they’re excellent income-producing assets)
- Considered a lower-risk strategy than growth stocks or investing in the market as a whole
- Dividends can be reinvested for further growth
- Share prices can appreciate over time, and dividends help to offset losses during bear markets
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Frequently Asked Questions
It depends on your investment goals and risk tolerance. Growth investing provides the potential for higher returns but also comes with more risk. Dividend stocks are a lower-risk strategy and offer the benefit of income from dividends as well as the potential for share price appreciation over time.
The downside of dividend stocks is that they may not experience the same levels of growth as some other types of investments. In addition, companies can reduce or eliminate their dividends at any time. And, of course, dividend stocks can drop in value too, just like any other stock.
Yes, some growth stocks offer dividends. However, they tend to be much lower than the dividends paid by more established companies that offer high dividend payouts. Growth stocks usually focus on reinvesting profits into the business to drive future growth, so their dividends tend to be less reliable and significant.
Stocks that pay a dividend can be a good option during a recession, as they provide income from dividends and the potential for share prices to increase over time. Dividends also help to offset losses if the stock price drops during bear markets. However, it’s important to remember that there are no guarantees with investing and that dividend payments can be reduced or eliminated at any time.
Should You Invest in Dividend or Growth Stocks?
The type of investing strategy that’s right for you will depend on your financial goals and risk tolerance. If you’re looking for steady returns with less volatility, dividend stocks may be the way to go. However, if you’re willing to take on more risk in exchange for potentially higher returns, growth stocks may be a better option.
Understanding the risks involved with both types of investments is essential to make an informed decision about which is best for you. Growth stocks have the potential for greater rewards but come with more risk than dividend stocks. On the other hand, dividend stocks offer steadier returns and are often considered a safer investment option. Ultimately, deciding which approach is best suited for your financial situation is up to you.
And if you don’t want to pick individual stocks, you can invest in ETFs to simplify the process. See our lists of the best ETFs for long-term growth and the best dividend ETFs. This is an excellent way to invest for your goals without spending time researching stocks to buy.
No matter which strategy you decide to pursue, be sure to do your research and create a well-diversified portfolio that meets your needs. Investing in dividend or growth stocks can both be profitable strategies if done correctly, so don’t forget to consider both options when deciding how to invest your money.
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