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Growth Stocks vs Dividend Stocks Which is the better choice
In the stock market, the shares of listed companies are broadly classified into two categories – growth stocks and dividend stocks. The way that the companies in these two categories operate, generate and distribute revenue, and appreciate in value are all significantly different from each other. So, when you choose to invest your hard-earned money in the stock market, it becomes important to know the category that’s right for you. And here’s everything that you need to know about growth stocks vs dividend stocks.
What are growth stocks?
The shares of companies that have a high future growth potential are commonly known in the share market as growth stocks. This category primarily consists of companies that are still in the growth stage of the business life cycle. The profits earned by these companies are generally not distributed to the shareholders as dividends. Instead, they are retained by the company and utilised for the purpose of furthering their businesses through activities like funding new projects and purchase of new assets.
Additionally, the cash flows of such companies are not quite stable, with some companies even experiencing negative cash flows for certain periods. This can be attributed to increased marketing, research, and product development expenses. Growth stocks are typically overvalued and tend to trade at a premium due to the greater levels of future growth potential. However, the appreciation in the share value of these companies is also much higher. They tend to outperform the market when the conditions are favourable.
What are dividend stocks?
The stocks of companies that regularly and consistently distribute the profits earned by them as dividends to their shareholders are commonly known in the stock market as dividend stocks. Unlike growth stocks, dividend stocks are usually in the maturity stage of a business life cycle. These companies are generally well-established, enjoy greater goodwill, and may have been in business for decades. Since they’ve already attained maturity, dividend stocks usually do not enjoy much future growth potential.
One of the main benefits that dividend stocks enjoy is the stability with respect to the cash flows. Revenue generation is largely consistent with very little ups and downs and almost no negative cash flow scenarios. Since these companies have been in existence for quite a long period of time and are pretty well-known and respected by the general public, the marketing and research expenses are quite low. This allows them to distribute a greater portion of their profits to their shareholders, retaining very little. Also, dividend stocks tend to be fairly valued due to little to no future growth potential.
Growth stocks vs dividend stocks – a comparison
Now that you’re aware of everything there is to know about these two categories of stocks. Here’s a brief comparison between growth stocks and dividend stocks.
Typical investment term
Short-term to long-term
Not very stable
Very stable and consistent
Level of risk
No dividend payouts
Regular and consistent
Value appreciation and return on investment
Low to medium
Growth stocks vs dividend stocks – which one should you choose?
The choice between growth stocks and dividend stocks depends primarily on your investment horizon, your age, your income, and your financial goals and objectives. In addition to this, your risk appetite also plays a huge role in resolving the growth stocks vs dividend stocks dilemma.
For instance, if you’re a risk-aggressive investor looking to stay invested for a long period of time to create wealth, investing in growth stocks would be the better choice. This is primarily due to the fact that growth stocks have inconsistent cash flows and do not pay out dividends. However, by staying invested for the long-term, you can neutralise the risks involved and get to enjoy more value appreciation due to higher future growth potential.
Alternatively, if you’re an investor who is risk averse and you wish to enjoy regular and consistent returns on your investment, then investing in dividend stocks would be the right choice. By investing in these stocks, you can not only protect yourself from underperformance and market fluctuations, but also ensure a steady stream of income. That said, by opting for dividend stocks, you’d essentially be giving up on future share value appreciation in exchange for a regular source of revenue.
As you know by now, when it comes to growth stocks vs dividend stocks, there’s no clear winner. The choice of stock depends primarily on what your expectations are. Considering the unpredictable nature of the share market, you would be in a much better position if you diversify your investment portfolio by allocating your investment capital equally towards both growth and dividend stocks. This way, you can benefit from a regular source of income and enjoy future share value appreciation.