Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

New Investors: Dividends vs. Growth — Which Is Better?

Published 2021-09-13, 10:30 a/m
Updated 2021-09-13, 10:46 a/m
New Investors: Dividends vs. Growth — Which Is Better?

New Investors: Dividends vs. Growth — Which Is Better?

Canadian investors can easily invest in Canadian or U.S. stocks, but there are thousands of stocks to choose from. Moreover, new investors often have little capital to work with. How do you make sure that you’ll earn good returns on your stock investments when some say that the stock market is just a big casino? How do you start investing with confidence?

Stock investing doesn’t have to be speculative. First, build an emergency fund so that you won’t be forced to sell your investments at a bad time. Then invest your excess cash in solid stocks. Should you invest for dividends or growth first?

Start with stable dividend stocks Not all dividend stocks provide safe dividends. Look for companies with a track record of dividend payments through market cycles. Ideally, they would have stable growth to support a growing dividend. Having a safe payout ratio is also another safety net.

Some common places to search for safe dividends are utilities, banks, telecoms, consumer staples, healthcare, etc. Here are some dividend stocks from each of those sectors for further research: Fortis, Royal Bank of Canada, Comcast (NASDAQ:CMCSA), General Mills (NYSE:GIS), and Pfizer (NYSE:PFE).

This list of safe dividend stocks will provide stable returns through an increasing dividend income and steady long-term price appreciation. If your stock portfolio earns a yield of, say, 3% from a dividend portfolio, you’ll always get that stable return from the dividends. Aim to buy when the stocks are undervalued to maximize your yield and returns.

Growth stocks to lead the way Some investors have looked back on their investing strategy and wished that they had started investing in growth stocks instead of stable dividend stocks. The reason is that growth stocks can potentially grow one’s wealth much faster with higher growth rates. The longer your money is compounded at a high rate of return, the larger your nest egg grows.

Here’s a chart comparing a $10,000 initial investment in the Canadian stock market versus various growth stocks including Alimentation Couche-Tard, Amazon (NASDAQ:AMZN), Enghouse Systems, Open Text, and Netflix (NASDAQ:NFLX) over the last 10 years. You’ll find that growth stocks that pay a dividend tend to have low yields but usually increase their dividends at a faster rate.

Total Return Level data by YCharts.

When investing in growth stocks, consider companies that make good use of technology. These companies tend to grow their revenue faster. Ideally, they should have growing earnings or cash flow as well.

The Foolish investor takeaway Should you start investing for dividends or growth first? There’s no absolute answer. For different investors, prioritizing one over the other would make more sense. Investors who need income now should prioritize dividends over growth. Some investors are more comfortable with a balance of dividends and growth.

The important thing is to get started by saving and investing regularly. You will surely make mistakes along the way, but that’s just how everything else in life goes. And you will learn from them and make better investment decisions, as you gain more experience. If you don’t need income for another 10 years or longer, it’ll be more rewarding to focus on higher-growth stocks, whether they pay dividends or not.

The post New Investors: Dividends vs. Growth — Which Is Better? appeared first on The Motley Fool Canada.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and recommends ALIMENTATION COUCHE-TARD INC, Amazon, Enghouse Systems Ltd., and Netflix. The Motley Fool recommends Comcast, FORTIS INC, OPEN TEXT CORP, and Open Text and recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. Fool contributor Kay Ng owns shares of Alimentation Couche-Tard, Amazon, Fortis, Enghouse Systems Ltd., Netflix, and Royal Bank of Canada.

This Article Was First Published on The Motley Fool

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.