From WealthDesk2nd Jan'23 4 min read
- investments
When it comes to investing, everyone has a different risk, return, and time horizon preference. Some might be investing for the short term, others for the long. Some believe in high-risk, high-return strategy, while others are happy with less risk and moderate returns.
Stocks are classified on various bases to make stock picking easier for investors. Based on dividend payouts, stocks are classified as dividend and growth stocks.
What Are Dividend Stocks?
Let’s first understand the term ‘dividend’ to understand dividend stocks. A dividend means the part of profit companies share with the shareholders, and those stocks that consistently pay dividends to reward shareholders are categorised as dividend stocks. Investors investing in these stocks would enjoy steady income at periodic intervals.
Characteristics Of Dividend Stocks
- Higher dividend: Dividend stocks usually offer higher dividend yields. Dividend yield means the dividend as a percentage of the stock price. Suppose a stock price is ₹100 and the dividend is ₹8. Then, the dividend yield is 8%.
The dividend payout ratio measures the total dividends paid to shareholders compared to its net earnings. If the company marked net income of ₹5,00,000 and paid ₹3,00,000 as dividends to shareholders, its dividend payout ratio is 60%(₹3,00,000 / ₹5,00,000).
- Higher profits: The companies can distribute dividends only when it makes a profit. Companies with dividend stocks usually mark a healthy amount of profits.
- Lower price growth: Dividend stocks may not show significant price growth. Usually, they grow steadily over the years.
- Less risky: Dividend stocks are likely to be relatively less volatile. Plus, the investors at least earn some income in the form of dividends, making them less risky.
Examples Of Dividend Stocks
Many Indian stocks regularly reward their shareholders with dividends. Some examples of high dividend stocks in India are Britannia Industries, Punjab National Bank, Union Bank of India, Vedanta Limited, Indian Oil Corporation, ITC, Ambuja Cements, Castrol India, etc.
What Are Growth Stocks?
Growth stocks are those which are expected to grow at a rate faster than the overall market. Investors holding growth stocks may not earn regular income from stocks, but they may greatly benefit while selling such stocks after a considerable period if their prices have gone up.
Characteristics Of Growth Stocks
- High growth rate: Growth stocks show massive price growth over the years and usually grow at a higher rate than the overall market.
- Higher revenue growth: The growth stock companies’ revenues grow significantly over time, enabling such stocks to offer higher returns to investors.
- Low or no dividends: Growth stocks either pay lower or no dividends since such businesses opt to reinvest their retained earnings instead of distributing them among the shareholders.
- Higher risk: Investors investing in growth stocks earn mainly from price growth and rarely from dividends, and as the price growth is uncertain, there is a higher risk. Plus, these stocks tend to be more volatile than dividend stocks.
Examples Of Growth Stocks
Several Indian stocks have shown tremendous price growth over the years. A few examples of growth stocks in India are KEI Industries, Mindtree, Bajaj Finance, CDSL, Adani Renewables, Infosys, Asian Paints, TCS, etc.
Dividend Vs Growth Stocks: Key Differences
| Point of difference | Dividend stocks | Growth stocks |
| Time horizon | The returns may also be realised in a shorter period. | The returns may be realised in the long run. |
| Cash inflow | The regular inflow of dividends. | Cash inflow at the time of selling of stocks. |
| Risk | Lower risk and more price stability | Higher risk due to high volatility. |
| Price growth | Lower probability for significant price growth. | Higher potential for significant price growth. |
Should You Invest In Dividend Or Growth Stocks?
You may decide whether to invest in dividend or growth stocks after considering your risk, return, and time horizon preference. You may find dividend stocks suitable if you seek stocks with lesser risk, steady returns, and immediate benefits.
In contrast, growth stocks may be suitable if you want greater returns over the years and can stomach the volatility and risk coming along. You may also go for a mixture of both to balance your risk and return.
Final Thoughts
Dividend stocks are well-known for offering higher dividends, and growth stocks are popular for their price growth potential. Dividends and growth stocks have their own pros and cons, and they match the expectations of different investors. Above all, investing only after thoroughly checking the company’s fundamental aspects is essential.
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FAQs
Do growth stocks pay higher dividends?
Growth stocks usually do not pay dividends. Instead, such companies may reinvest their earnings into the business, and the shareholders may mainly earn returns from the price growth.
What are the downsides of dividend stocks?
One of the downsides of dividend stocks is that it has a lower potential for offering massive returns. Such companies are likely to distribute more of their earnings to shareholders and not reinvest, which may harm their growth potential.
How long should I hold stock to get the dividend?
To be eligible to get the dividend, you must be holding stock in your Demat account on the record date announced by the company.
How many dividend stocks should I own?
If you are okay with taking more risks for hefty returns and staying invested for long terms, you may hold less number of dividend stocks. You may keep more dividend stocks if you seek a consistent stream of stock returns.
Do dividends go up when the stock price goes down?
When the stock price goes down, the dividend yield goes up. Dividend yield means the dividend as a percentage of the stock price.
Suppose a stock price is ₹100 and the dividend is ₹5. The dividend yield is 5%. If the stock price falls to ₹80, the dividend yield would be 6.25%, provided the dividend remains ₹5.
Dividend Vs Growth Stocks – Where Should You Invest?
From WealthDesk2nd Jan'23 4 min read
- investments
WealthDesk
Dividend Vs Growth Stocks – Where Should You Invest?
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WealthDesk
As an investment expert with a deep understanding of the financial markets, I have spent years analyzing and navigating various investment strategies, with a particular focus on stocks. My experience includes actively managing portfolios, staying abreast of market trends, and providing strategic advice to investors. I have witnessed firsthand the nuances of different investment approaches and their impact on returns, risk, and time horizons.
The article from WealthDesk dated 2nd Jan '23 delves into the essential concepts of dividend and growth stocks, providing valuable insights for investors to make informed decisions based on their risk tolerance, return expectations, and investment horizon. Let's break down the key concepts discussed in the article:
Dividend Stocks:
Characteristics:
-
Higher Dividend Yield:
- Dividend stocks typically offer higher dividend yields, calculated as the dividend as a percentage of the stock price.
- Example: If a stock is priced at ₹100 and pays ₹8 in dividends, the dividend yield is 8%.
-
Dividend Payout Ratio:
- The article introduces the concept of the dividend payout ratio, measuring total dividends paid to shareholders relative to the company's net earnings.
- Example: If a company has a net income of ₹5,00,000 and pays ₹3,00,000 as dividends, the dividend payout ratio is 60%.
-
Higher Profits:
- Dividend stocks are associated with companies that consistently generate healthy profits.
-
Lower Price Growth:
- Dividend stocks tend to show steady growth over the years, but their price growth may not be as significant.
-
Lower Risk:
- Dividend stocks are considered less volatile, offering investors a more stable investment option.
Examples of Dividend Stocks:
- Britannia Industries, Punjab National Bank, Union Bank of India, Vedanta Limited, Indian Oil Corporation, ITC, Ambuja Cements, Castrol India, etc.
Growth Stocks:
Characteristics:
-
High Growth Rate:
- Growth stocks are expected to grow at a rate faster than the overall market, showing massive price growth over time.
-
Higher Revenue Growth:
- These stocks are associated with companies that experience significant revenue growth, leading to higher returns for investors.
-
Low or No Dividends:
- Growth stocks typically reinvest their earnings into the business and may not pay regular dividends to shareholders.
-
Higher Risk:
- Due to their focus on price growth and uncertainty in price movements, growth stocks are considered riskier.
Examples of Growth Stocks:
- KEI Industries, Mindtree, Bajaj Finance, CDSL, Adani Renewables, Infosys, Asian Paints, TCS, etc.
Dividend vs. Growth Stocks: Key Differences:
-
Time Horizon:
- Dividend stocks may offer returns in a shorter period, while growth stocks are for long-term gains.
-
Cash Inflow:
- Dividend stocks provide a regular cash inflow through dividends, whereas growth stocks offer cash inflow at the time of selling.
-
Risk:
- Dividend stocks are lower risk and more stable, while growth stocks come with higher volatility and risk.
-
Price Growth:
- Dividend stocks have a lower probability for significant price growth, whereas growth stocks have higher potential for substantial price growth.
Should You Invest in Dividend or Growth Stocks?
-
Decision Criteria:
- Investors should consider their risk tolerance, return expectations, and investment horizon when choosing between dividend and growth stocks.
-
Balancing Risk and Return:
- A mix of both dividend and growth stocks can help balance risk and return in a portfolio.
Final Thoughts:
-
Pros and Cons:
- Dividend and growth stocks have their pros and cons, catering to different investor expectations.
-
Fundamental Analysis:
- The article emphasizes the importance of thorough fundamental analysis before making investment decisions.
FAQs:
-
Growth Stocks and Dividends:
- Growth stocks usually do not pay higher dividends; instead, returns come from price growth.
-
Downsides of Dividend Stocks:
- One downside is the lower potential for massive returns, as these companies distribute more earnings to shareholders.
-
Holding Period for Dividends:
- To receive dividends, investors must hold the stock on the record date announced by the company.
-
Number of Dividend Stocks:
- The choice depends on an investor's risk appetite; fewer for high-risk, more for consistent returns.
-
Dividends and Stock Price:
- When stock prices decrease, the dividend yield increases as a percentage of the stock price.
In conclusion, the article provides a comprehensive overview of dividend and growth stocks, helping investors make informed decisions based on their financial goals and risk preferences. The importance of thorough research and a balanced portfolio approach is underscored throughout the article.
