When you want to invest in stocks, you must research the companies you want to invest in as much as possible. That way, you know you’re making a good investment decision. One question that many investors contemplate when comparing different investment options is whether they should invest in dividend stocks or focus on growth stocks. So, do dividend stocks outperform growth stocks?
Dividend stocks do outperform growth stocks, especially over a longer investment horizon. While some growth stock companies do exceedingly well, not all growth stock companies are successful. Contrarily, dividend stocks are backed by strong financials and have a history of generating strong returns.
When you see a company offering dividend stocks, that often means that it is financially stable. Overall, you’ll want to conduct a lot of research into the business model of the company and its fundamentals before making any meaningful investment in its shares.
Further in this article, I will explain the key differences between the dividend stocks and growth stocks, and share my perspective on how you can decide between the two. So, for an interesting discussion on the subject, read on!
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Dividend Stocks vs. Growth Stocks
You want to have a variety of investment products in your portfolio so that you can build wealth that is virtually recession-proof. You also want to have a passive income source so you can reap the benefits of your investments.
- Growth stocks are those that can build your wealth, but they don’t pay any income.
- Dividend stocks are those that give you an income while still building your wealth. (arguably, at a relatively slower rate)
Comparing long term stock returns of a basket of growth stocks and dividend stocks, it has become apparent that dividend stocks outperform growth stocks over the long term. This is because not all growth stocks become the Amazons and the Teslas. A sizable number of growth stocks tend to fail over time.
This consistency means the dividend stocks tend to do better than the general market. You’ll therefore want to definitely keep them in consideration as you contemplate your investment options. In most cases, you’ll have better luck investing in dividend stocks than growth stocks.
Advantages of Investing in Dividend Stocks Over Growth Stocks
There are many advantages to investing in dividend stocks, including getting a portion of the company’s profits. For many, dividend investing is a great way to earn a reliable passive income.
Let’s take a closer look at these advantages.
Consistent Payments
Dividend stocks usually outperform growth stocks (in aggregate) on top of offering consistent payments. This benefit comes from the company being more financially stable than the ones that don’t offer dividends. That also means you’re at less risk when you invest with them.
Businesses Have Strictly Managed Finances
When businesses offer dividends, they need to strictly manage their finances to ensure that their shareholders receive the dividend payments. As long as you make sure the yield and cash flow of the company are stable, there’s a lot less risk associated with dividend stocks.
You have opportunities for a high-dividend yield, higher incomes, and more.
Dividends Might Be Tax-Exempt
Additionally, many forms of dividends are tax-exempt. What this means is the dividends aren’t always subject to federal income tax. This means that come tax time, you can write off a significant portion of your income. It’s an excellent option for those looking to make passive income.
Disadvantages of Investing in Growth Stocks Over Dividend Stocks
There are a few downsides to growth investing, causing many to prefer dividend stocks.
Unlike dividend stocks, growth stocks don’t give investors monthly or quarterly dividends. That means all of the money you invest in your growth stocks stays within the company.
All of the excess money your stock generates stays in the stock, so you can only make a profit off the stock if you redeem or sell it. You need to watch the market and have more of a hand in making money.
It’s not a passive income method.
Plus, many people feel nervous about investing in growth stocks. You’re betting that the company will grow and generate a higher value in its stock when you do so. However, these stocks still work well for someone who has the knowledge and the strategy to identify the next unicorns. If you know what you are doing, these stocks can indeed deliver you an outstanding return.
In comparison to dividend stocks, below are the two disadvantages of investing in growth stocks:
Growth Stocks Are Highly Volatile
It’s worth noting that growth stocks can be extremely volatile. That means the stock can change in value, one way or the other, very quickly. Many people feel stressed out when dealing with these types of stocks.
One day you could earn a lot, but the next day, you could lose a lot of investment value.
You’ll need to have a higher tolerance for risk when working with growth investments. If that doesn’t sound like it’s for you, that’s alright. There are other, more stable stocks you can invest in.
Growth Stocks Can Often Take Too Long To Grow
Growth stocks aren’t for investors with a short-sighted view. Most experts say that investors should wait at least 5 years before selling or trading their growth stocks. For some people, waiting that long is unacceptable.
You’ll need to consider how much time you want to put into your growth stock before committing to it.
Why Invest in Dividend Stocks Over Growth Stocks?
There are several reasons you might want to purchase dividend stocks, instead of growth stocks.
If you want a long-term source of income, dividend stocks are a great investment. Many investors choose dividend stocks for this reason.
Plus, dividend stocks tend to outperform growth stocks in nearly every way.
History has shown that companies that distribute dividends have outperformed growth stocks. Additionally, companies that take the time to grow their dividends also perform better than the competition, which likely has to do with demand for the stock.
Dividend Stocks Are High in Demand
When a company offers dividends, the demand for their stock suddenly increases, making it worth a lot more money. Plus, the yield makes it stand apart from growth stocks in the eyes of investors.
If a company can continue paying its dividends, even in a recession, the company comes across as strong and more reliable by the shareholders.
A stable company grows more over time, as long as it has strong financial leadership. When these companies have lower profits, they may adjust their cash flow to continue paying their shareholders. Therefore, investing in dividend stocks, your downside risk reduces considerably in comparison to growth stocks.
Overall, dividend stocks are often very in-demand.
While this feature makes them cost more, it’s more likely that the company will make more consistent returns. That way, you can receive a reliable passive income from the stocks you have in your portfolio.
Dividend Stocks Can Hedge Against Inflation
Additionally, growth stocks can’t hedge against inflation as well as dividend stocks.
The yield allows you to fight inflation on all of your savings, so you don’t need to worry about the value of your money decreasing with time. Many expert investors suggest adding dividend stock to your portfolio for this reason.
According to ETF Trends, using dividends is a better method to hedge against inflation when compared to gold, TIPS, or cyclical stocks. So, if you’re looking for a better way to improve your portfolio and plan on investing in the long term, the best option would have to be adding some more dividend stock to your investments.
Dividend Stocks Are Reliable During Tough Market Periods
Many investors also use dividend stocks to protect their savings during challenging stock market periods.
During these times, it’s a lot harder to turn a profit by buying and selling stock. Instead, with a bit of extra patience, you can make the dividends work for you. That way, you can still earn money during slow market periods.
Since dividend stocks grow over time, you’ll want to make sure you reinvest what you earn from the stock at least until you can reach your monthly money goals. Many professional investors make between $500 and $1,000 on their stock dividends alone.
This amount of money is enough to help investors make it through challenging market situations.
Overall, the dividend stock is highly reliable. You’ll want to make sure to consider it before thinking about growth stocks.
While growth stocks have their place, they aren’t as efficient during tougher market times.
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Conclusion
Dividend stocks tend to outperform growth stocks, and with the dividend yield, you get a monthly passive income. Plus, you get a safer hedge against inflation, a way to protect yourself during unstable market moments, and several other benefits.
Dividend stocks are a sign that a company is doing well. The stock indicates that the company needs to focus on managing their stock correctly, so their shareholders can receive the promised dividends.
Not every company will offer them, but you’ll want to consider buying stocks of the companies that do offer dividends. Overall, it’s worth your time to buy dividend stocks.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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