Cuapa Asset Management

There is a debate over whether it’s wisest to purchase dividend stocks, growth stocks, or a combination of both. Here are a few pros and cons of each.

Dividend Stocks

Dividend stocks are shares of companies which focus on paying out a share of their income to investors during given time periods.

Pros

-Dividend stocks often come with less risk attached to them, because the board of directors pays out many of the earnings to investors rather than risking them on new investments.

-Dividends are useful to have coming into an investor’s portfolio if the investor wishes to diversify, because they can reinvest the dividends elsewhere.

-Dividend stocks often allow for the investor to enroll in a Dividend Reinvestment Plan (DRIP), which automatically uses the dividends to purchase extra shares of the stock at a discount, giving the investor greater ownership of the company and greater dividends over time without having to pay extra commissions to their broker each time more shares are purchased.

Cons

-Dividend stocks are often more conservative companies, so there is less of a chance for aggressive growth in equity over s short period of time.

-Paying out dividends prevents companies from using that capital to reinvest in more profitable enterprises which may increase the equity of the stock even more over time.

-Companies may pay out dividends just to maintain investor confidence, even if their sales are poor, making it possible for them to go into debt.

Growth Stocks

Growth stocks, unlike dividend stocks, focus on reinvesting their dividends and growing the equity value of the company’s shares by doing so.

Pros

-Growth stocks are more likely than dividend stocks to show aggressive periods of fast growth due to their reinvestment of capital.

-Companies with good boards of directors may be able to reinvest their earnings better than if individual investors used the earnings to purchase other shares. Berkshire Hathaway, for example, does not pay a dividend and instead lets Warren Buffett reinvest the money and sees excellent returns as a result.
Cons

-If a board of directors is incompetent, makes the wrong choices, or simply is wasteful, capital which may have been paid out as dividends to investors could be simply wasted on bad investments or corporate perks.

-Investors cannot use the earnings from some shares that they hold to invest in a new equity somewhere else on the market.

Summary

There is a clear distinction between solely dividend-paying stocks, and solely growth stocks, but sometimes it’s possible to get the best of both worlds. This is common in foreign companies, particularly European ones. Switzerland’s Nestle, for example, and Germany’s Henkel, both focus on moderate growth while paying out a high annual dividend (five to ten percent) to their shareholders.

The most important thing to keep in mind is the quality of the business’ management rather than how its profits are divided. Only then should you consider the debate over dividend versus growth stocks.