Quick Guide to Understanding Dividend Stocks vs Growth Stocks in 2023

It is common sense that an investor needs to have a good grasp of different types of investments rather than going by gut feeling or someone else’s recommendations. You need to know how investments work and whether they match your investment goals. This holds true when investing in stocks as different types have different timelines for reaping the benefits.

What is right for one person is wrong for another investor. Here is a quick guide to help you choose the perfect stocks for you.

Dividend Stocks

Dividend stocks pay out dividends to shareholders with stock. This means that investors in dividend stocks can look forward to annual pay-outs as a form of passive income. However, you need to understand that the pay-outs may not add up to a lot. For example, an investment of one million dollars with a two percent dividend will only yield $20,000 annually.

A second advantage is that the person still holds the same number of shares that gain in value if their market value continues to experience growth. Usually, companies that offer this type of stock are confident of their ability to pay dividends. This indicates their financial and cashflow health. The executive management of the former ensures that their companies make good decisions to make pay-outs possible.

The possibility of tax-free federal income is dependent on stock that has qualified and other factors. It is a benefit worth checking out. A tax deduction increases the ’per dollar value’ of your stock compared to dollars that have been taxed.

Those who are most suited to dividend stock investing prefer a greater cash flow and/or shorter investment period.

Growth Stocks

Companies offering growth stocks do not pay out annual/periodic dividends. All profits are reinvested in the business, which follows a growth strategy. As an investor, you will only make a profit when you sell your shares for more than you paid for them. You can also redeem stocks to get the current value. 

The management of these companies may invest in the latest technology, new processes and/or equipment, or any strategy that is likely to make the business grow. On the other hand, companies with dividend stocks avoid new expenditure tactics so that they can pay shareholders annually. When you buy growth stocks, you need to be confident that the share price will increase to make earnings available for later when you sell the stock. 

If you are earning a monthly income and have many more years to go before you retire, it makes sense to invest in growth stocks so that you can build up a nest egg for retirement or for when you are no longer able to work. You would need to have less need for annual dividends, i.e., a lower requirement for additional income.

Factors to Consider when Choosing between Dividend Stocks and Growth Stocks

People have different risk profiles. If you choose to buy growth stocks, you should be in a position to wait for the company to really grow and increase the value of your stock. If you are anxious about long-term investments, you are better off with dividend stocks where you can get some income from it in the short-term (usually a year) and sell your stock quickly if the company shares devalue. 

Those who prefer growth stocks generally have a higher propensity for risk and can wait for the value of the stock to appreciate over a longer time horizon, e.g., two or three decades. Take cognizance of your current income and overall liquidity. If you have savings, you can determine the best place to invest your money for the highest returns. 

It is important to compare different companies before deciding on which one to invest in. For details of some of the best and most popular dividend stocks, look at sites that provide up-to-date comparisons of investment opportunities and give explanations and advice on stock options. There are several factors that must be considered prior to shelling out your hard-earned money. 

Take the time to do your research, then decide on the type of stocks and company you are comfortable investing in.