Dividend Stocks vs Growth Stocks: Which One Will You Choose? Swastika

Dividend Stocks vs Growth Stocks: Which One Will You Choose?

While entering the market, every investor wishes to invest in stocks that provide high returns. With this intention, they invest in different types of stocks that generate high returns.

Although there are different types of stocks available in the market, selecting the right one is still a challenging job.

Dividend stocks and growth stocks are a big fuss these days. Individuals prefer dividend stocks while some people prefer growth stocks over any other stocks. 

But dividend stocks vs growth stocks: which one will you choose? This has been a point of debate until now.

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Dividend Stocks

Let’s first understand what dividends are. So it is the portion of the firm’s overall profits that it chooses to hand out to shareholders rather than make an investment.

Dividends are usually paid to investors as compensation for their capital contributions to the organisation.

Stocks that consistently pay dividends to their stakeholders are referred to as dividend stocks. 

If investing in dividend stocks, check the two factors related to dividend stocks: dividend ratio and dividend yield.  

The total number of dividends given to stakeholders with respect to the company’s annual income is known as the dividend payout ratio. The dividend yield reveals the annual dividend payout of a corporation with respect to its stock price.

A few examples of dividend stocks include:

  1. Vedanta Ltd., with a yield of 17%
  2. Coal India Ltd. with a yield of 8%
  3. Bharat Petroleum Corporation with a yield of 5%

Growth Stocks

A growth stock is, generally, a share in any firm that is likely to grow faster than the market as a whole.

Growth stocks do not share a portion of their revenue with investors, in contrast to dividend stocks.

Because, in the case of growth stocks, they frequently reinvest their profits into the company. This stimulates the increase in these stocks.

To check whether the stock is a growth stock or not, analyse the metric Pay-to-earning ratio (PE ratio).

Based on previous or estimated results, a PE ratio reveals the price that investors are willing to pay for a stock today.

Growth stocks might be viewed as expensive since they are considered to have significant growth potential.

Few examples of growth stocks:

  1. Tata consultancy services Ltd.
  2. Reliance Industries Ltd.
  3. Asian Paints Ltd.

Which Option to Choose?

As we have gone through both the stocks’ dividends and growth, here comes the main question: which will you choose among these two stocks? 

The answer to this question depends on the investor’s time horizon, risk preference, and the kind of return that he is looking for.

Investors who want to build wealth over a longer period of time should put their money into growth in order to stay invested and generate longer-term rewards.

You won’t get an immediate payout or any interest on an undergrowth investment. 

On the other hand, dividend investments are for the types of investors who are searching for a stable and consistent cash flow throughout the years. However, your investment will grow with time.

To choose between these two stocks, the following factors can be considered:

Risk Tolerance

As compared to dividend stocks, growth stocks are riskier because to sell the stocks you want their price to increase so that you earn more profit by selling them and for this, you hold them for the long term but these always seek unpredictability.

Whereas dividend stocks are less risky than growth stocks. Firms that pay dividends have a strong track record, which means that their payments are consistent and dependable.

However, dividend payments are typically less than capital gains, and by distributing their profits rather than reinvesting them, these businesses limit the possibility of stock price increasing.

Also Read: Which are the Best Dividend-Paying Stocks in India?

Time Horizon

Investing in growth stocks is a more long-term approach. The ideal time to sell a stock is after holding it for a number of months or even years while it appreciates. However, it might produce higher returns.

Dividend stock is a short-term investment strategy. You can simply move in and out of dividend stocks because you are not trading them for their long-term financial gains.

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Cash Flow

The returns from dividend stocks come in regular instalments. Most businesses pay dividends on a quarterly basis, as was already mentioned.

A regular formula is generally used by most businesses to structure their dividend payments, if not to make similar dividend payments.

As a result, dividends are a suitable choice for investors that require a consistent and dependable cash flow.

Growth stocks offer returns that are very irregular. Although you can decide on a standard cost at which to sell your stocks, the market is always erratic. 

Your stock may not even reach its target cost, and you can’t even predict when it will hit the target. Growth stocks are therefore a reasonable choice for investors who can maintain their money invested in the market while waiting for sales.

Conclusion

Here we have covered the two most important stocks of the market – dividend stocks and growth stocks. Both stocks work for their investors differently. Dividends behave as per the dividend yield of the firm while growth stocks depend on past revenues and upcoming predictions.

 

If you are a complete beginner and want to start your investment journey, then open a Demat account with Swastika.

 

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