What's the Difference Between Growth and Dividend Stocks?
Some stocks grow more than others. Some have higher dividend yields. Some have a good balance of both growth and dividends.
But what does all of this mean?
Growth stocks. Growth is the amount a share price appreciates in value. If we buy a share for
$50 and it goes up to
$100, that’s growth. In order to realize growth, we have to sell the stock. Companies that don’t pay dividends, or pay very low dividends, are reinvesting that money back into the company so that the company can grow at a faster rate. More growth means higher share prices.
Dividend stocks. Dividends are profits from a company passed onto the shareholders. Suppose our
$50 share pays us
$2 per year. We don’t have to sell our share to get the
$2. Typically, dividends are paid out by companies who are already making large profits and are not prioritizing rapid growth. Instead of using their profits to grow, they pass them onto shareholders. Generally, healthy companies pay roughly
40-60% of their free cash flow out in dividends, using the rest to put back into the company.
The difference. The difference between the two is that dividends give us money now but don’t have as much growth. The
$2 we get is taken out of the share price. This means our
$50 share is now worth about
$48. It will likely bounce back to
$50, but the payout naturally inhibits growth. It reduces the amount of money the company can spend on growth because it’s paid out to us. The growth stock that didn’t pay anything out does not decrease in the same way. All stocks fluctuate, but the higher the dividend yield, the more stagnant the share price.
The value of a growth stock stays in the share, whereas a dividend stock will pass on some of the value to shareholders regularly.
We’ll notice here that growth stocks are important for those investing at a young age. There is ample time to allow these companies to mature. However, this requires deferring the immediate satisfaction of money now for more money later.
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