Over the long run, dividend stocks have had very attractive total returns, averaging 9% annually. This has made drip investing (dividend reinvestment plans) quite popular. Stocks with drip allow an investor to automatically reinvest the dividends they receive into buying additional shares. But lately the returns from innovative stocks and disruptive stocks deemed as growth stocks have far outpaced dividends stocks.
So which type of stocks are better for you as an investor? The comparison of dividend vs growth stocks is important to your financial returns as we explore the two alternatives.
Many investors in dividend stocks would readily accept a 9% return from the “average” dividend stock over the long run. Dividend stocks are attractive because they pay a current amount of income in the form of dividends, plus you get price appreciation on the share price. The combination of these two can lead to an attractive total return. Remember that if you own a stock with price appreciates of 6%, and its dividend yields 3%, you’ve got a total return of 9%.
It is the attractiveness of these total returns on dividend stocks that have made drip investing so popular in recent years. Stocks with drip allow you to automatically reinvest the dividend income received to buy shares of the company stock to increase your holdings. Drip programs offer a great way to slowly increase the number of shares you own in a company and to correspondingly increase your dividend income.
Here is what we see as the attractiveness of dividend stocks right now:
There are a few potential pitfalls to watch for with dividend paying stocks:
If you are looking for a high-quality dividend stock, consider Dominion Energy (ticker D). Dominion Energy is one of the largest regulated electricity utilities in the United States, with a market capitalization of approximately $60 billion. The stock currently yields 3.5% and I would expect that to increase 5% to 6% annually, in line with profit growth.
Innovative stocks have been on quite a tear the last couple years, led by the technology sector.
These growth companies are defined as a business that is growing revenues and earnings faster than the stock market averages. This is particularly true when looking at future long term growth opportunities. Given the growth in the use of technology worldwide it is not surprising that innovation stocks and disruptive stocks in the technology sector are leading the way for growth stocks.
Think of innovation stocks and disruptive stocks as those companies that are challenging the status quo of how things are done. A few examples of innovations stocks and disruptive stocks are:
Zillow – challenging the way we look for and buy homes
DocuSign – challenging the way we sign and save and share documents
Zoom – changing the way we stay connected with co-workers and loved ones
These growth stocks are usually valued by metrics other than the traditional metrics around price-earnings ratios, etc. Often, they are valued as a multiple of sale. This is because many of these kinds of companies are in their early stages, where they are investing for future mega-growth, and therefore do not have profits yet. In these cases, investors are trying to determine just how big the addressable market is for the business and how fast the growth company can obtain a large chunk of related revenue.
Here is what makes innovative stocks attractive right now:
Here are a few things to watch out for when investing in growth stocks:
Depending on your investing strategy, either dividend stocks or growth stocks can be right for your portfolio.
And it is fine to mix and match. You can select some high-quality dividend payers to act as a ballast to your portfolio and sprinkle in some growth stocks to try and super charge your returns.
Innovative stocks and disruptive stocks are currently quite popular, so invest slowly in these kinds of companies to maximize your returns.
Use the four examples of dividend stocks and growth stocks discussed above to help you get started with your research.