It also saves a lot of notary and other transaction costs. Nice article. I recognize the potential in growth stocks but not all growth stocks have delivered their promises either. We like to hear about that rogue investor who quickly became a millionaire but you hear seldom of those investors who bankrupted themselves.
Now this may not make me a multi-millionaire but in terms of gambling, I think this is a safe bet for a conservative investor, like me.
And while dividends are taxable, so is the capital gains if you sell stocks at a profit. Sure, I get it on single examples. But I hope you and others do digest the reasons for why I think younger investors should invest in growths stocks, and why all investors should allocate some portion of their stock portfolio to growth stocks.
I see things more clearly now as a business owner who finds growth to be difficult, but who appreciates growth by any company who can continue grow. Thanks for the prompt reply!! And yes, portfolio balance depending on age is the key. I am not that young anymore and certainly not that experienced as some of you out here and thus I emphasize more on dividend stocks of reputable companies that have solid history nothing to be ashamed off.
One advantage I have at least is that I work in academia and thus my pension is lifetime for me as well as my surviving spouse. With a pension, you have certainly hit the jackpot! Any irony is, with pension, you can take more risks if you want to.
I think there is a major failure for many people in the assumption that a dividend stock can not also be a growth stock. Price appreciation can easily happen while a company is paying a dividend. Now do they outpace a company like Tesla?
No, but they do provide a great return on top of the compounding effect of a dividend. I also think that paying a dividend does not mean a company is not reinvesting in itself. If a company has a wide moat and good financials, that remaining free cash flow can be put to great use outside of just supporting a dividend.
I think one of the major problems people have with dividend stocks is they expect them to work like a growth stock and yield chase. This typically means they end up with lower quality companies, or companies more suited for a retiree to generate monthly income. What you outline here is really smart and are some of the pitfalls I see so many people complain about when they get into the markets.
How have your dividend stocks done compared to growth stocks? And how long have you been investing? There are definitely benefits of dividend stocks and dividend stocks can definitely perform well as sell. I have plenty of dividend stocks as I head into retirement again. But I have already accumulated my nut. I started my journey focused on growth because I still had plenty of time in the market. I think with growth stocks you are always going to have the opportunity to really maximize your wealth accumulation short term, but for longer term investors I think if you find dividend stocks with strong growth factors you can benefit from maybe less price growth that is offset by compounding factors from reinvestment.
Also, thank you for the well wishes. More of a passion project than a business, but I hope it can help people along the way as a free tool. I have known of your site from some time and have taken inspiration for how many great resources are out there from people just trying to help. The great thing about investing is that everything is rational.
We invest in what we feel right. And then we accept the outcome, 5, 10, 30 years from now. Sounds like you are in your late 20s or early 30s? But good thing time is on your side.
Growth stocks crash. At least with a dividend you have a payback period. I think about dividends being money off the table, a slow de risking of the invest. I mean payback period is also an important financial metric? That optionally is really compelling, especially in a bear market with a portfolio that produces cashflow.
Cash is king. I tend to value a consistent payout ratio on mature companies with reasonable future prospects. You have to think beyond the quarter, beyond the year, and grow long-term with these companies.
Stick with them. I also own a few dividend stickers, and take the dividends and plow them back into growth stocks. I believe dividend-producing funds or stocks are invaluable for early investors because over time, you actually own additional shares with reinvestment, whereas rising stock prices and gains is on paper only unless you cash out. Paper gains can be wiped out real quick with a crash and I think one is inevitable. Hopefully you are in the middle or second half of your financial journey.
Great post, Sam! I wish people understood that dividends also have an opportunity cost. What if the company used that money to invest in better NPV projects? During my MBA program, I took a course titled Advanced Corporate Finance, and our professor explained this concept very well using the example of Microsoft.
Fortunately, he has made his course available for free online, and the curious mind can go and read more about this concept here: janschneider. Tarun — my young friend, I suspect that the MBA theories and the nice, cut from reality graphs that come with them will not bring wealth to most people.
Even a kid can look at graphs post-factum and build whatever theories he can imagine. The truth is — no one can predict the future and this is where the big problem for real people lays. He admits that later on in life you should add dividend stocks but he fails to explain how exactly should this magic happen — are we talking here about moving funds from growth to dividend later in life for success in such strategy you obviously need to be really lucky in timing the market properly or most of the new funds you invest later in your life should be directed towards dividend stocks.
I wonder why. The biggest culprit of investing all in growth when you start investing is that growth is much more unpredictable and volatile short term than investing in dividend and compounding it. All you can leave behind that has some sort of control are dividends, not growth.
Only dividends can give you the freedom to not touch the principal this month — again, because dividends are much less volatile than growth. Just a random guy browsing the internet here… Mike fails to understand the risk to reward ratio.
If you have a few mil in the bank and want a hands-off risk-free income, put it into dividend stocks. This is where the risk to reward comes into play.
Yes, you can build up your dividend portfolio and reinvest dividends until u ready to retire a very safe but slow strategy.
Also, each time you collect dividends, you pay taxes. Why would you collect a dividend to pay taxes and turn back around to reinvest into the same portfolio facepalm here? Instead, the goal for the young person would be to get to the few mil portfolio as fast as you can. One of the ways to do so is to buy and hold growth companies like Tesla. You want to dca into your top picks over the next years.
This is what true compounding is all about. Everything in this life is about the risk to reward ratio. Most people would eliminate risk to feel safe, but the reality is that the more risk you take the more successful you will be. If you are feeling fancy, you can go day trade some options to take as much risk as you can, you might get rich quick ;.
I want to do the same but when I am Does the time worth the risk? The dividend payment lowers cash, so enterprise value goes up. Empirically, dividend stocks outperform. From , dividend stocks returned on average 9. But while there are big winners like amazon, growth stocks underperform on average. Perhaps the biggest argument against dividends is the inefficient tax nature of it, and instead would be better off with stock buy-back programs which allows investors to time their dividends appropriately.
But most will just underperform their dividend peers. Sam, I always look forward to your articles because they get me thinking about the best ways to allocate my investments. Thank you for this article. From your other articles, I had come to the conclusion that maximizing income was important, and that dividend stocks were a way to increase income.
Having said that, though, I agree with the gist of this article. I have been investing for a short time, but I realized recently that by using dividend stock strategies only, it would take forever to get to financial independence. Investing in growth stocks to grow the number of dollars, and then moving them to dividend stocks to grow the passive income, is my current strategy. And actually, the value of dividend income has also gone up with interests rates having come way down.
I tend to agree the younger you are the more chances you should take. However, if you invested any money into T exactly 10 years ago today and reinvested your dividends your annual return is 6. Not Tesla money but not bad either. I think younger people should look at dividend stocks more as bonds with a higher potential for appreciation. For sure. Now the difference is even more pronounced. I mostly agree.
Young investors should invest in growth stock. However, it depends on your track record too. I sold too early and owned too many bad stocks. My main problem with growth stock is their share buyback programs. They always invest badly and buy back when share price is high.
IMO, dividend is much better than share buy back. I wish I understood this stuff when I was a young investor. But at least I tried, saved, and put money into the markets.
At least I plan to teach my kids as much as I can about investing to help them out as much as possible. I feel like a logarithmic graph is underutilized in comparisons like this.
Look at DIS vs. I too am a fan of dividend investing, and my portfolio is more weighted towards them than you would expect from my age group. It can eat into your returns. I am According to mortality tables, I have ten years left. A blink of an eye. If everything goes bad, I only have ten years to live with it. If at 30 I make a major mistake, I will live with it for 50 years. Become educated. Read and read more and then you will understand diversification is not your friend, trading is foolish.
Look at it this way. I put money into Dividend Champions, Aristocrats and Contender for more than 20 years. You find the list on my blog. My advice is: be patient. Thank you for the great article.
Good work. Thank you very much for this article. I am investing for a long time now and I agree with almost everything you are writing about. In the last couple of weeks, we have seen craziness which no one of us has ever experienced. These times show, that no investing strategy is safe all the time.
BUT, it is a good time for us to prepare for future opportunities. Many of the best opportunities start in a bear market or in corrections. Be careful, learn, be prepared and safe all of you! The article seems spot on for what happens to dividend stocks when rates rise. Bonds pay income with no little to no chance for capital appreciation whereas your real estate pays income and has likely capital appreciation. The real estate has the added advantage of rising rents over time. What do you think of substituting real estate for bonds?
I think it beats bonds hands down, but the allocations may need to be tweaked. I just hate bonds at these levels. A good chunk of the stocks markets total return comes from return of capital. Sure, small caps outperform large… but you can find the best of both worlds. I like to stick to the Warren Buffett investing methodology. Anyone else do something like this?
Just do the math. I am learning this investment. Invest in the market i. Fees are almost negligible say 0. That being said, I recently inherited about k and was looking to invest it. I should also mention, that I have about 75k in a traditional IRA. I am willing to take on some risk… and was wondering if you or any of your readers, have any suggestions. Clearly, there is significant evidence to support the long-term outperformance of dividend-paying stocks. The following section will discuss the fundamental reasons why these securities tend to beat the market.
Reason 1: A company that pays dividends must have underlying operations that actually support that dividend. Said another way, dividend-paying securities must have earnings and cash flow to distribute to shareholders — or else their dividend payments would not be possible. Reason 2: Dividend-paying companies have less internal cash flow available to fund organic growth opportunities, meaning that corporate management must focus on only the best growth opportunities.
In other words, it means that the company is shareholder-friendly, a characteristic that likely impacts other behavior at the C-suite level. Along with these business-level characteristics, there are other reasons why we like dividend stocks.
First, from the perspective of the portfolio manager, dividend stocks are highly preferred because they generate a constant stream of cash that can be deployed into new investment opportunities. This dividend income stream is far more constant than stock prices are, which means investors have the ability to buy more stocks when stock prices are low.
Dividend stocks also avoid the main problem with growth stocks: valuation risk. Personal Finance. Your Practice. Popular Courses. Part Of. Introduction to Dividend Investing. How Dividends Work.
Stocks Dividend Stocks. Table of Contents Expand. High Yield is Best. Dividend Stocks are Always Boring. Dividend Stocks are Always Safe. The Bottom Line. Key Takeaways Many investors look to dividend-paying stocks to generate income in addition to capital gains. A high dividend yield, however, may not always be a good sign, since the company is returning so much of its profits to investors rather than growing the company.
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This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. If the company has cut dividends in the past, investors may fear that they'll do so again. Lots of investors hope to find the next great IPO. While it's exciting to get in on the ground floor of a successful company, you shouldn't overlook opportunities with companies that are already successful.
Cash-generating giants can line your pockets with the cash from dividend payments. As you collect your dividends, a stock's value could grow—perhaps slowly, compared to successful IPOs, but much more steadily. Office of Investor Education and Advocacy. Financial Accounting Foundation. The Vanguard Group. Actively scan device characteristics for identification. Use precise geolocation data.
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