The Complete Guide to Growth vs. Dividend Stocks

As if things weren’t already complicated enough when it comes to investing. Choosing between what type of investment account to open, who to open it with, and what type of securities to invest in, now you have to evaluate between different types of stocks.

While every stock is unique, because they represent a company and every company is different, stocks can be grouped based on certain criteria. One way to evaluate your options is by looking if the stock is considered a growth stock or a dividend stock. There are some stocks that don’t fall into either category, but these two categories cover the majority of companies. And both categories have their own advantages and disadvantages, so it’s best to look at both.

Growth Stocks

Growth stocks are defined by having the potential for great growth, and as a result, great returns. These are stocks that analysts view as having a great upside. There is the potential for their stock price to grow faster than the average market index and provide above-average returns.

With greater return comes greater risk. Growth stocks are usually perceived as riskier than most stocks. Since these companies are less established and growing, a big part of their valuation is based on the company growing at a fast rate. Some growth stocks may have high valuations without having a history of consistent profits.

Also, growth stocks usually do not offer dividends.

Growth stocks should not be confused with penny stocks. Penny stocks are usually under $1 a share and the companies are not well-established. Penny stocks are an even bigger gamble than growth stocks.

It is also important to note that growth stocks are not exclusive to technology stocks. Growth stocks can exist in any industry.

Examples of some well-known growth stocks include Tesla, Netflix, Square, Shopify, and Nvidia.

Dividend Stocks

Stocks that pay dividends usually have a lower growth opportunity. Dividends are payments to shareholders from a company’s retained earnings. A company can decide to use a portion of their retained earnings to reinvest in the company for future opportunities that will help it grow, or pay those earnings back to shareholders for investing in the stock.

When companies give dividends, it is usually because there is not too much growth available to them. You won’t see Tesla giving out dividends any time soon. Even though Tesla is one of the largest market caps, they still believe there is room for growth and advancement in the industries they operate in. An old, established company like AT&T, which is not going to reinvent the wheel, can comfortably pay out dividends from their retained earnings because they do not need that money for innovation.

Dividend stocks usually provide a return less than growth stocks. But there is less volatility with them. Less return, less risk.

While the stock price for dividend stocks may not grow as much as they do for growth stocks, dividend stocks also offer dividend payments as a form of return. Most companies pay dividends quarterly and almost never miss a payment. Investors anticipate these dividends and account for them in their valuations of the company.

Examples of well-known dividend stocks include AT&T, Coca-Cola, Johnson & Johnson, and AbbVie.

Ending Remarks

Having a mix of growth and dividend stocks can be beneficial for your portfolio. Depending on your age, you may want a different mix than someone older or younger than you. Both types of stocks have advantages in their own right.

As long as you’re investing and researching the companies you put money into, you’re on your way to financial freedom. Something to remember: the greater the return, the greater the risk.