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Which is better, dividend stocks or growth stocks?
What is the key difference between dividend stock investing and growth stock investing?
Dividend Stock Investing Vs Growth Stock Investing
When it comes to dividend stock investing, I liken it to putting my money in a fixed deposit with a higher interest rate but minus the almost guaranteed protection of principal and interest income.
For example, if I invest in a dividend stock with a dividend yield of 8%, I could easily get my money back in less than 13 years assuming its dividend is unchanged.
After 13 years, you are getting paid dividends for free for the rest of your life, assuming that the same dividend continues for years to come.
First of all, is this entirely possible?
A company paying the same dividends (or even growing dividends) for decades?
Yes, it’s possible.
Here’s a list of companies that have been not only paying dividends for decades but also have been INCREASING dividends for decades.
They are called dividend aristocrats.
As you can see, companies such as Procter & Gamble and Coca-Cola have been increasing its dividend for more than 60 years.
So, it’s possible to get dividend income year after year for many decades.
The key is of course to find such great dividend companies that not only pay dividends consistently but also increase dividends every year.
What makes dividend stock investing more powerful is that you could reinvest dividends to buy more shares and let compounding do its magic.
Let’s compare the results of the dividend reinvestment strategy with that of investing without dividends reinvested.
For example, I invest $100,000 in a dividend stock that is paying an 8% dividend once a year.
Assuming the dividend payout remains constant and the stock price also remains constant and there is no tax, here’s what I would get after 20 years:
With dividend reinvested: $320,713.55
Without dividend reinvested: $220,000
As you can see, there is a big difference.
Now, let’s see what I would get after 30 years:
With dividend reinvested: $574,349.12
Without dividend reinvested: $280,000
As you can see, compounding makes a much bigger difference in returns over a longer period of time.
If there is also capital gain (i.e. stock price increases over time) and if the company keeps increasing dividend payouts year after year, my returns would be much higher than that.
So, when it comes to dividend stock investing, I think it’s a safe investment strategy for conservative investors as long as you choose your dividend stocks wisely.
For example, it’s always a good idea to go for dividend stocks that have a decent dividend yield, a very high probability of maintaining their dividend payouts, and a good chance of consistently increasing their dividend.
For some dividend investors, it’s the dividend income that attracts them because they might not be working anymore and use this as a source of income.
On the other hand, with growth stock investing, what investors are really looking for is capital appreciation because they are expecting the company can keep increasing revenue and profits at a decent rate every year.
Generally, growth stocks don’t pay dividends.
Instead, they normally use their profits either to expand or buy back their own stock.
Google is a typical growth stock with very solid financials and long-term growth potential.
Most importantly, Google has a very strong competitive edge that keeps its competitors away.
What’s Google’s competitive edge?
Its competitive edge manifests in the following areas:
- The advantage of scale (i.e. the dominance of Google’s search engine)
- Google’s intellectual property—specifically, its search engine algorithm
- Google’s brand name
What about Google’s financials?
Below is the graph of Google’s annual revenue from 20012 to 2021.
What about Google’s profit margin?
Google’s profit margin has been consistently staying at around 20%.
What about its balance sheet?
Does it have a high level of debt?
As of the end of March 2022, Google’s Debt/Equity ratio was 0.06, indicating an extremely low level of debt.
In fact, over the 15-year period from 2005-2022, Google’s Debt/Equity ratio has never risen above 10%.
Now, let’s take a look at its cash.
Its cash and investments have grown massively in the last 10 years as shown in the graph below.
Here’s Google’s share price chart as of Nov 2022.
As you can see, Google’s share price has increased more than 3,600% since its IPO.
It is this kind of massive potential returns that growth stock investors are attracted to.
If you are looking for safe and good growth stocks to buy, you should look for stocks such as Google.
Of course, there are also many growth stocks that are growing their revenue but not yet making a profit because they prioritize growth over profits.
Personally, I find investing in unprofitable high-growth stocks risky because it is still a losing business.
But, I must admit that high-growth stocks could have the potential of becoming multi-bagger stocks in the future. If the investment does not work out in the end, I could also lose most (if not all) of my investments.
For example, Beyond Meat is a good example of a high-growth stock crashing more than 90% in a span of two-plus years.
It had a good story and it was reporting double-digit growth in revenue.
However, it all ended when its revenue growth stopped and its profit margin deteriorated.
On top of that, it’s bleeding cash every quarter, so it’s going to be very challenging if it cannot turn its operating cash flow positive soon.
There are many “high-growth” stories gone bust.
But, there are also successful “high-growth” stories.
For example, Netflix and Amazon are two successful “high-growth” stories.
All in all, I am still more comfortable investing in profitable businesses with long-term growth potential and only allocate a very small portion of my portfolio to high-risk high-growth stocks.
Best Dividend Stock To Buy
If you want to find the best dividend stocks to buy, Seeking Alpha provides Dividend Grades to help you with your dividend stock research and analysis.
So, how does Seeking Alpha Dividend Grade work?
Is it really useful?
Can it help you successfully avoid dividend cuts?
Also, can you really use it to find good timely dividend stock ideas?
Seeking Alpha helps you evaluate dividend stocks by looking at the following:
- Dividend Safety
- Dividend Growth
- Dividend Consistency
- Dividend Yield
For each of the above, a “Grade” is assigned to indicate the strength (or weakness) of the dividend stock after analyzing and comparing relevant metrics among stocks in the same sector.
“Grade A+” is the best while “Grade F” is the worst.
Now, let’s dive in and look at how Dividend Safety Grade is being derived and whether it can be trusted.
After having backtested more than 4,000 financial metrics (including 600 newly acquired metrics from S&P Global), Seeking Alpha has narrowed them down to 27 individual metrics (as shown below) to calculate the Dividend Safety Grade.
As you can see, the Dividend Safety grade is pretty robust.
For example, metrics for profitability, debt, analyst dividend estimates and revisions, and momentum are all being taken into account.
How has Seeking Alpha Dividend Safety grade performed so far?
Based on back-tested results, if you stick to stocks with Seeking Alpha Dividend Safety Grade of A+ to A-, you would have avoided 99% of dividend cuts since 2010.
This result is really very impressive.
What is more, for a limited time only, you can try Seeking Alpha Premium for 14 days risk-free and see if it works for you.
Best Growth Stocks To Buy
To find the best growth stocks to buy, I have several platforms that I use to find potential growth stock ideas.
For example, I have been using Motley Fool Rule Breakers.
Its investment strategy is focused on uncovering the little-known stocks that have great potential to be the market leader in the future.
Here are the five things that they look for in a good growth stock:
- Innovative Company (i.e. it must be an innovative company that is making waves in emerging industries)
- Competitive Advantage (i.e. it must have competitive advantages over its competitors. For example, patents, proprietary technology and etc)
- Sustainable Business (i.e. it must be a business with good long-term prospects and are unlikely to get disrupted by new technology)
- Good Management (i.e. it must have a good management team and strong leadership)
- Strong Consumer Appeal (i.e. it must have strong branding and strong customer interest)
Generally, these growth stocks will be stocks that fall into the following categories:
- Stocks in emerging countries (e.g. China, India, South Africa, South Korea, Mexico, Thailand, Indonesia, etc)
- IPO stocks (i.e. newly listed stocks on the stock exchange )
- Stocks in fast-growing and emerging industries (i.e. Cyber Security, Big Data, Cloud Computing, 3D Printing, etc)
- Stocks of future technology companies (e.g. Internet of things, 5G, Artificial Intelligence, Blockchain, etc)
So, how have Motley Fool Rule breakers’ growth stock picks performed in the past?
Below is the performance comparison between Rule Breakers and S&P 500 as of 10th July 2023.
As you can see, Motley Fool Rule Breakers beat the market by almost 2 times during the same time period.
Here are some best-performing stock picks by the Motley Fool Rule Breakers team of analysts.
- MercadoLibre: 5,589%*
- Tesla: 14,656 %*
- Shopify: 39,116%*
- The Trade Desk: 16,918%*
- Intuitive Surgical: 5,232%*
- Meta (Previously Facebook): 1,143%*
- Etsy: 979%*
- Hubspot: 514%*
- Monster Beverage: 1,441%*
- Universal Display: 1,464 %*
[*Returns as of 27th Jan 2022 since it was first recommended. Past performance is no guarantee of future results. Individual investment results may vary. All investing involves risk of loss.]
Motley Fool Rule Breakers stock picks are all high-growth stocks with very high volatility.
In other words, the potential gain can be very attractive but at the same time, the potential loss could be big as well.
If there is a bear market like the one in the year 2022, you would see that quite a number of recommended stocks are down.
However, there is also another way to look at it.
The bear market gives one of the best opportunities for investors to load up on good stocks at a very cheap price.
Markets go up and down.
Stocks would eventually recover after some time.
Personally, I don’t buy every stock recommendation.
I mainly use Motley Fool Rule Breakers to find growth stock ideas and then do my own research and analysis as well.
If you are investing in the stock market, it’s always a good idea to do your own independent research and make your own investment decisions instead of letting other people take over control because no one cares more about your financial well-being than yourself.
Of course, you should also remember that there are always risks involved in investing, especially in high-growth stocks.
I am fully aware of the potential risks as well as the potential rewards, so I am only allocating a very small part of my investment portfolio to high-growth stocks.