Growth Investing or Dividend Investing?
Both are good in their own ways, so how?
Source: Random internet photo finds + my powerpoint skills to put everything together
I can't tell you how many times I have received this question from my friends and readers who were starting their investment journey.
Anyway if you are reading this, chances are it is because somewhere along your investing journey you have been told to choose between 'Growth investing' or 'Dividend investing'. This is important as depending on the type of investing you choose to focus on, the type of stocks to buy will differ. In this post, I would examine both types of investing and discuss the type you should go for.
And if you are total beginner to investing and have no idea what I am talking about, don't worry and I would try to make it as clear as possible in this post for my readers.
Before I begin, I would first like to talk about what how we measure returns in investing, before diving in to what Growth investing is, followed by Dividend investing.
TOTAL RETURNS OF INVESTING
For the investing novices out there, returns of investment is simply how much your initial investment capital "returns" you after a period of time, and is usually expressed in percentage.
There are two types of returns:
When your stock is worth a higher price in the market than it was originally bought (a.k.a capital appreciation*).
How much annual dividend your stock paid out (just like how your savings account pays out interest, most stocks** also pay out some cash (a.k.a dividends) within the year for holding them).
* Note if it is worth a lower price than it was originally bought then it is capital depreciation. In this case the returns is negative then.
** Not all stocks pay out dividends, facebook for example does not pay dividends, choosing to reinvest additional cash it has back into its business instead.
As such, total returns of investing can be found by summing up (1) the capital appreciation (the 'Growth' part) and (2), the dividend yield (the 'Dividend' part) of the stocks you have bought.
Mathematically, we have: Total Returns = Capital Appreciation/Depreciation + Dividend Yield
Example 1: If you bought one unit of stock A for $100 in January and the stock is worth $103 in December, your unrealised capital appreciation/growth for stock A during this year is $103 - $100 = $3. Putting it in percentage, your capital appreciation/growth for stock A this year is $3 / $100 = 3%. Note it is unrealised since you did not sell stock A. If you sold it and earned this $3, then it is realised.
Example 2: If you bought one unit of stock B for $100 in January and the stock pays out $1 every biannual as dividends, your total annual dividend payout for stock B is $1 * 2 = $2. Putting it in percentage, your annual dividend yield for stock B this year is $2 / $100 = 2%.
Example 3: You bought one unit of stock C for $100 in January, and the stock is worth $103 in December. Furthermore, the stock pays out $1 every biannual as dividends. From Example 1 and 2, we know that the unrealised capital appreciation/growth for stock C during this year is also 3%, and the annual dividend yield for stock C this year is also 2%. Since total returns = capital appreciation + dividend yield, the total returns for stock C is 3% + 2% = 5%
With these three examples in mind, we can now dive further into the topic of Growth investing and Dividend investing.
As seen in our Example 1 above, Growth investing refers to the strategy where investors invest in stocks that primarily experience capital growth more. These stocks usually belong to companies whose earnings are increasing / expected to increase at a rate that is above the market average.
As such, embarking on the path of Growth investing can be said to be done in the hopes of making returns through an increase in stock prices in the future, i.e. returns primarily coming from capital appreciation/growth.
Examples of growth stock/ETFs are: Apple Inc. (AAPL), Microsoft Corporation (MSFT), Invesco QQQ Trust ETF (QQQ), Vanguard S&P 500 Growth Index ETF (VOOG)
Most growth stocks belong to that of large companies expanding rapidly (e.g. the technology sector now), as well as smaller companies or emerging markets (which can easily expand fast).
Something to take note here is that as these companies are mainly focused on growing and expanding, most of its spare cash are reinvested into their operations, rather than distributed out as dividends.
As such, a common characteristic of growth stocks is a low dividend yield, or even the lack of dividend at all.
Note: Majority of the common growth stocks come from the United States and emerging economies.
On the other hand, as seen in our Example 2 above, Dividend investing refers to the strategy where investors invest primarily in stocks that pay a good dividend yield. These stocks usually belong to blue-chip companies or Real Estate Investment Trusts (REITs).
Blue-chip companies generally refer to companies that are well-established, financially sound and are generally market leaders in their own fields, while REITs refer to companies that owns and operates income-producing real estate.
A such, embarking on the path of Dividend investing is done in the hopes of enjoying returns in form of regular dividend cash payouts, i.e. returns primarily coming from dividends.
Examples of dividend stock/ETFs are: DBS Group Ltd (D05), Singapore Telecommunications Ltd (Z74), SPDR Straits Times Index ETF (ES3), Lion-Phillip S-REITS ETF (CLR)
Most dividend stocks belong to that of blue-chip companies (their stable operations are more able to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their steady dividend payouts), as well as REITs (Rental income is generally stable and less susceptible to short-term economic impact).
Contrary to growth stocks, something to take note is that as these companies are no longer focusing on rapid growth and expansion, most of its spare cash are usually given out as dividends to shareholders. This also means a lower growth trajectory since lesser cash are now reinvested into operations.
As such, a common characteristic of dividend stocks is a low capital appreciation/growth, or even the lack of growth at all.
Note: Most of the common stocks you find in Singapore are Dividend stocks.
SO WHICH ONE?
As seen above, it is clear that growth and dividend stocks differ in distinct ways.
The former works with investors accepting a lower dividend payout but having expectations that these stocks will one day have the possibility of a higher capital value, while the latter works due to investors' desire on these stocks to pay out a higher dividend in exchange for limited capital growth.
There will always be a disagreement on which is the better method.
However, the below is my personal two cents:
If you are young (between early twenties to mid-forties), you are more likely able to tolerate a higher risk appetite, and to go for long-term capital growth. As such, I would suggest opting for a portfolio with a higher proportion of growth stocks.
If you are older (mid-forties to retirement), you are more likely to have a lower risk appetite, and to prefer a stable passive income. As such, in this case, I would suggest opting for a portfolio with a higher proportion of dividend stocks.
That said, I stress again that the above is not absolute. You have to also factor in your own financial situation, as well as the economic condition of the economy.
For me personally, I started off my portfolio with a higher proportion of growth stocks.
Which type of investing would you go for and why? Let me know in the comments section below!
In the meantime, if you are still using a normal savings account that pays out 0.05% interest per annum, you might want to check out the Singlife account that pays 2.5% interest per annum.
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Disclaimer: All information contained herein this blog is solely the writer's personal opinion, and does not constitute an offer, recommendation or solicitation of an offer of any kind. Readers are also advised to do their own due diligence, and to consult a financial adviser for any financial advice.