Summary: Many prefer to invest in “growth” stocks instead of “value” stocks which often pay a growing dividend. They think growth means more money in the end. However, dividend-paying companies demonstrate higher, not lower, growth rates than the so-called growth stocks. The terms worth knowing are are value, blend and growth.
Value stock: Common characteristics of such stocks include a high dividend yield and a low P/E ratio. Good ‘value’ stocks increase their dividends every year.
Blended fund: This is typically a stock mutual fund with a mix of value and growth stocks. I have a low opinion of this type of investment product. If you want value and growth, then buy a good value fund and a good growth fund. Don’t pay more for something that is complex.
Growth stock: Growth investors choose stocks based on the potential for capital gains, not dividend income. They might have dividend, but it is stingy. The P/E ratio can be VERY high, like Amazon’s P/E of about 232! Do not miss the word “POTENTIAL.”
Why Dividends Matter
- They are sticky. Companies that pay a dividend, don’t like to stop or reduce them.
- Capital gains come and go. You don’t realize the gain until you sell. Dividends can be used to buy groceries and pay for other necessities of life.
- Growing dividends are a positive indicator. The board of directors doesn’t like to get into a bind where they pay out more than they think the company can earn in future years. If the dividend increases, it is often an affirmation of the future potential of the business.
- Dividend reinvestment is powerful. If you automatically reinvest your dividends, you get more shares that can pay more dividends. That is not possible with a company or ETF that does not pay a dividend. If you want more shares, you have to buy the shares with cash from somewhere.
- Management often makes silly investment decisions. Let’s face it, growth companies build more factories, hire more workers, buy other businesses and build an empire. That might be good, but perhaps management would be more thoughtful if they gave 50% of the profits to you and used the other 50% more carefully to expand the business. If they do both well, then you will do very well.
Conclusion: Don’t mistake growth for more money or a better investment. It is actually better to think of “growth” as more potential risk and little or no paycheck until you sell. Show me the money. ETF’s like VYM, DGRO and DVY have a history of showing me the money. They also grow in value.