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Dividend vs growth stocks. Trust the numbers and invest with common sense

Jamie Cameron
6. 4. 2023
4 min read

The age-old battle - growth and speculative investments that can bring you great wealth quickly, or long-term sensible investments that will bring you wealth more slowly but with a much greater likelihood of doing so? The numbers show that there is probably only one right way.

Investments can take many forms. But some are a little better

Dividend or growth investments?

I'll say straight out that, although it may sound like it from the introduction, the question of whether it's better to invest in dividend or growth stocks has no clear-cut answer and depends on each investor's investment goals and preferences.

Dividend stocks are stocks of issuers that pay out a portion of their profits to shareholders in the form of dividends. These stocks are often considered stable and less risky because dividend payments can provide the investor with a regular income. Dividend stocks are often found in traditional and stable industries such as energy, telecommunications and food processing.

Growth stocks, on the other hand, are focused on the growth and development of a business and typically do not pay dividends. These stocks are often found in technology and innovative industries that have high potential for growth and profitability in the future. Growth stocks are often considered riskier because a company's performance can be uncertain and profitability can vary significantly depending on the success of innovative projects and new products.

If the investment objective is certainty and a long-term horizon, dividend stocks are a better choice. At least that is what history and data show. Most investors are aware of the power of compound interest - and dividends work similarly, especially when reinvested back into the company.

Take a look for yourself at Coca-Cola's $KO+0.5% chart

With and without dividends reinvested. I think the difference is pretty clear. Source

Of course - if you buy, say, a second Tesla when no one knows about it yet, you're out of business... but what are the odds. On the other side is a company that has been increasing its dividend for 50 years in dilution. What are the odds they don't raise it again? Especially if you simply look at the financials and results and see that nothing has changed significantly?

The good thing is that companies can't fake dividends - the company either declares a dividend or it doesn't. Unlike all sorts of startups that promise a product they may not even have yet.
Dividends can help combat volatility - that's because the dividend yield increases as the market price of the stock falls, making the stock more attractive.

Interest rates

It's also important to understand how both types of stocks behave in relation to interest rates. Long term, we are likely to be in a low interest rate environment. However, inflation is high due to the huge amount of stimulus after the pandemic. As a result, dividend stocks and blue-chips should outperform growth stocks in a high interest rate environment. Only when the Fed starts to turn/cut rates will growth stocks return to favor.

When interest rates are low, companies can borrow more more money and cheaper. If a growth company can borrow debt at 2% and invest the money to grow its business by 10%, the growth company will outperform the dividend company. But only up to the first problem.

In a higher interest rate environment, dividend stocks perform better. Dividend paying companies generally have stronger balance sheets and more stable cash flows.

Interested in learning more about dividend investing? Then check out our Bulios Dividends!

Disclaimer: This is by no means an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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