With inflation rising and the stock market entering bear market territory, everyone is wary of what stocks to buy. Most investors are trying to figure out if they should stick to the safe dividend paying stocks or buy growth stocks and brace for the volatility?
One thing is certain when it comes to investing, every decision depends on your goals, risk tolerance, timeline and overall suitability. You have to decide what works for you and what you can handle.
Dividend or Growth Stocks?
Growth stocks are stocks that grow at a faster rate than the market average. They are mainly bought for capital appreciation (gains made from selling the stock). Most growth stocks are tech companies and they are known to be high risk. Some growth stocks include Netflix and Spotify
Dividend stocks are stocks that offer regular and steady dividends to their shareholders over a period of time. They are mainly bought for the income they generate and are generally low risk. Examples include Coca-Cola and Chevron.
Another thing to understand when it comes to investing is that businesses have a life cycle.
Everything in life goes through a cycle – from the weather, to growing good and even to businesses. Understanding the business life cycle of a stock is important in interpreting its performance. There are three (3) major business cycles and all companies in the stock market go through it. They are
Raising Capital: This is the beginning stage of a business. Companies in this stage are high risk especially in a rising interest rate period like this current market situation we are facing. They are highly dependent on new cash offerings and new debt as this is used to reinvest back into the business for more revenue in the future.
Self-funding Stage: Once a company is consistently profitable, they become self-funded as they have raised enough capital to be able to start taking care of themselves and make profits. They are lower in risk and they are now healthy and have grown sufficiently over the years.
Mature Stage: These are usually the dividend-paying companies. They are now matured in business growth and revenue and can start paying their investors/shareholders in the form of dividends.
Now that you understand business cycles and know your investment appetite – which are you going for? Dividend or Growth Stocks? Let’s argue.
Argument for Dividend Stocks
Pros: With Dividend stocks there is a low chance of them going bankrupt, as they consist of steady and mature businesses. In large quantities, they are good sources of passive income.
Examples of dividend stocks:
- Universal Group (UVV) pays an annual dividend yield of 4.96%
- Chevron (CVX) pays an annual dividend yield of 3.25%
Cons: Dividend stocks are for those looking to preserve/protect their capital – not grow it. With dividend stocks, there is a low chance of growing your capital. They are also best for a long-term horizon.
An older investor nearing retirement with a low risk appetite would be more inclined to having more dividend stocks in their portfolio, as they are sure of passive income and protection of capital.
Argument for Growth Stocks
Pros: Like the name implies, growth stocks are for growing your capital. With growth stocks, you can earn higher gains than dividends.
A younger investor with a high risk tolerance would be more inclined to purchase growth stocks as they are a way for them to outperform the market and make more gains.
Cons: The market this year has been brutal to growth stocks and this has happened before. They require a high risk appetite as most companies in this range are in their raising capital and self-funding stage.
Examples of growth stocks:
- Netflix (NFLX) shares have fallen 70.05% since the year began.
- Tesla (TSLA) shares have fallen 40.97% since the year began.
With all said and done, diversification and knowing your risk appetite is very important when it comes to investing.
So – which stock will you be adding to your portfolio this period? Let us know below.