The difference between growth stocks and dividend stocks
Both growth and dividend stocks can be great investment choices, but it all depends on your investment goals. This article explains the main difference between growth stocks and dividend stocks and how these differences can affect your investments.
What are dividend stocks?
Dividend shares are shares that pay a portion of the company’s profit to shareholders on a specific date that may be annually, quarterly, or even monthly.
Not all companies distribute part of their profits to investors, some of them like newly established companies and fast growth companies prefer to keep them to reinvest in other businesses. On the other hand, well-established companies with high market shares may distribute part of their profits in order to finance investments and establish expansion plans.
How do dividend stocks work?
Let’s say you buy 50 shares of Coca Cola (KO) that has announced that it will pay $0.5 for each share that investors own. To calculate how much dividends you’ll get this quarter, multiply the number of shares you own by the dividend per share: 50 shares * $0.5 = $25
What are growth stocks?
A growth stock is the stock of a company that has had above-average growth rates and can continue to provide high levels of earnings. Growth stocks are usually priced above average because investors are willing to pay a higher price for dividends since they expect it to grow quickly.
In general, growth stocks pay either modest dividends or zero dividends at all, and this is due to the companies’ decision to reinvest their dividends to maximize revenue generation potential.
The difference between growth stocks and dividend stocks
As mentioned earlier, there are two types of investment groups: growth and dividends. Each has its own advantages and disadvantages that vary depending on your circumstances and investment goals.
The main differences
In the case of growth stocks, the excess return generated by the stock is reinvested in the stock itself, while in the case of dividend stocks, regular returns are given to the investors every time period.
Profits from investing in growth stocks can only be realized when they are sold or redeemed, while in dividend stocks, you can withdraw excess profits in the form of dividends.
If the investor is looking for liquidity and cash at regular intervals, he should choose to invest in dividend stocks, but if he is looking for growth and wants to remain an investor for a long time, he should choose growth stocks.
Table of the difference between growth stocks and dividend stocks
Growth stocks
- A long time horizon, as the cash flow does not occur until the specified period ends.
- Cash flow upon redemption or sale only.
- Re-investment of excess return
- Funds are only tax deductible in some mutual fund schemes if you can invest for 15 years or more.
- Growth stocks have the potential to generate higher returns for investors. Growth stocks are ideal for investors who are not looking for an immediate cash flow and are looking to keep investing for a longer period.
Distribution shares
- A short time horizon where the cash flow is regular.
- cash flow at regular intervals.
- Distribution of excess return to investors
- The money received is tax deductible.
- Dividend stocks provide a steady cash flow, which is potentially less risky than growth stocks because the investor gets paid at regular intervals.
Which is better to invest?
Which one is right for you depends on your time horizon, your level of risk tolerance and the type of returns you are looking for. Investors looking to create wealth in the future should invest their returns in growth stocks to enjoy extended returns. It is true that you will not receive any immediate return or any payment in the form of interest, but rest assured that your investment will multiply over the years to give you exactly what you are looking for. On the other hand, investing in dividend stocks is for investors who are looking for a steady cash flow over the years.
Summary
In fact, no investment is always perfect or profitable in nature, rather we all know that returns are very volatile, and may depend on factors such as market sentiment, investor relationship with the company, and many other external factors. According to S&P 500 performance data, dividend stocks tend to outperform growth stocks, as they have the potential to generate higher returns than growth stocks.
If you are planning to invest in the short term and are looking for low risk, then consider investing in debt mutual funds. If you are looking for excellent returns, the short term and high risk mutual investment is what you should consider.
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