Investing in dividend stocks vs growth stocks are two different investing strategies that have served investors well over the years. Growth vs income stocks is an age-old debate as to which is better. It is likely that a combination of growth and income stocks is right for most investors.
Some investors closer to retirement age prefer stocks that pay a dividend vs growth stocks that are perhaps a little riskier because they don’t pay a dividend.
There are merits with both dividend vs growth investing. But equally important is the need to look at the merits of each company individually to see if it is right for your investment portfolio.
In fact, it is likely a combination of dividend and growth stocks that will give you the best chance of beating the S&P 500 index over the long run. There are even some hybrid growth income stocks that we will discuss that pay a reasonable amount of income via a dividend, that also are still in growth mode that will lead to stock price appreciation.
Let’s say you are one of the millions of dividend investors and targeting a total return annually of 10% on your stock investments. If you are getting 3% in cash dividends from the business each year, then that reduces the amount of price appreciation you need from your stock to hit your annual return target.
All investing portfolios should have at least some dividend paying stocks in them. It is likely that the closer you get to retirement age the more you need current income. As such, folks closer to retirement age will have a higher percentage of stocks in their dividend growth portfolio that pay a dividend.
Two things that are incredibly important when investing in a dividend paying business:
One of our favorite dividend payers right now is CVS Health Corporation (ticker CVS).
CVS is the largest pharmacy health care provider in the United States. Many of us think of CVS as the retail outlet we go to get our prescriptions filled. However, they are much more than that.
Since buying Aetna health insurance company in 2019 for $69 billion, CVS has become a fully integrated health organization. Kind of a one stop shop for all your health care needs.
CVS is a 3% yielding stock based on the current stock price. It has a price to earnings ratio of approximately 9, which is very low. As a result you should be able to get some nice price appreciation over the long run, along with getting paid a good dividend along the way.
At a 3% yield, CVS might not be a high yields stocks, but it is a good start towards hitting your annual targeted return.
CVS did take on a large amount of debt to make the Aetna acquisition. But the debt is being paid down quickly and as a result the dividend appears to be safe.
Many people, particularly during their working years, are not looking for income via dividend stocks. Those investors are willing to forgo getting quarterly payments from dividend stocks and instead invest in fast growing companies like Google, PayPal, or Amazon, etc.
Growth companies will keep their profits, instead of paying them out as dividends. This allows them to grow even faster by reinvesting those profits back into the business.
At Wealthplicity, here are the criteria that we will use to select great growth stocks:
Speaking of Eric Yuan above, Zoom is one of our favorite growth stocks right now.
2020 was the year that everyone got to know Zoom because of their wonderful video conferencing capabilities during the pandemic. But Zoom has been doing great things since Yuan founded the company in 2011 after he could not get Cisco, his former employer, to take up his video conferencing ideas.
What a blunder for Cisco, but what an opportunity for us.
Zoom definitively qualifies as a growth stock, with its daily active participants growing from 10 million in December 2019 to 300 million now. Not many businesses grow 30X in a year.
Zoom has a strong balance sheet, a fantastic leader and a long runway for future growth.
Growth income would be a hybrid of the dividend vs growth stocks strategies discussed above.
This hybrid would consist of investing in stocks or a mutual fund that pays a modest dividend, but the businesses are still growing at a more modest rate than full-fledged growth stocks.
One of the Best Growth and Income Funds Right Now
Vanguard Wellington has long been a favorite mutual fund for us in this category of growth and income.
Conservatively managed, $15 billion in assets under management, and yielding 2.1%, Vanguard Wellington invests in well-known growth companies like Apple, Microsoft and McDonalds.
There are many investing strategies to consider when investing.
Some people demand stocks that pay a dividend. Some look purely for fast growing companies. And still others look for hybrid stocks or mutual funds that are still growing but also pay a dividend.
All these investing strategies can result in good returns for your portfolio. Or feel free to mix and match so your portfolio includes a combination of all three.
Use the ideas above as you start your research into what kind of stock portfolio you want to build.