When choosing investments, there are many things to consider. It is important to consider your investment goals, time horizon, and risk tolerance. If you are investing for the long term, high growth investments may be a better option than low growth dividend paying stocks. Let’s find out why.
High growth investments are stocks of companies that are expected to grow their earnings at a faster rate than the overall market. These companies are often reinvesting their profits in order to grow their business, rather than paying them out as dividends. High growth investment returns tend to outperform the rate of inflation. This means that your investment will have greater value and better purchasing power in the future.
Low growth dividend paying stocks are stocks of companies that are expected to have slow or no growth in their earnings. These companies often have a history of paying out a large portion of their profits as dividends. These investments are less risky than high growth investments, however often times the dividend yield is less than the rate of inflation. This means that your account value may increase, but your purchasing power may not be as great since the investment return may not outpace the rate of inflation.
Long-term benefits of high growth investments
Higher potential returns: Growth stocks have the potential to generate higher returns over the long term than low growth dividend paying stocks. This is because growth companies are reinvesting their profits in order to grow their business, which can lead to higher earnings and higher stock prices in the future.
Less volatility: Growth stocks may have less volatility than the overall stock market. This is because growth companies are often well-established companies with strong financials.
More diversification: Growth stocks may provide more diversification to your portfolio than low growth dividend paying stocks. This is because growth companies are often in different industries and sectors than low growth dividend paying companies.
Examples of high growth investments [the following are also called the magnificent 7 due to their higher performance compared to the overall S&P 500 index]
Meta Platforms (META)
Now let’s look at dividend paying stocks. Low growth dividend paying stocks also have some advantages. Notably these are generally a great source of generating passive income.
Benefits of low growth dividend paying stocks
Steady income: Low growth dividend paying stocks can provide a steady stream of income. This can be beneficial for investors who are retired or nearing retirement or who want another stream of passive regular income.
Lower volatility: Low growth dividend paying stocks are typically less volatile than growth stocks. This is because these companies are well established, and their earnings are more predictable.
Potential for capital appreciation: In addition to providing income, low growth dividend paying stocks also have the potential to appreciate in value over time. This is because these companies are typically well-managed and have a strong track record of profitability. Although capital appreciation or a higher stock price is possible, it is usually much slower than the higher growth companies.
Examples of low growth dividend paying stocks
Utilities [DTE Energy, Duke Energy]
Consumer staples [Coca-Cola, Proctor & Gamble]
Telecommunications [AT&T, Verizon]
Healthcare [UnitedHealth Group and Johnson & Johnson]
Which type of investment is right for you?
The best type of investment for you will depend on your individual investment goals and time horizon. If you are investing for the long term and have a higher risk tolerance, then high growth investments are usually a good option for you. If you have a low risk tolerance and are looking for passive income, then low growth dividend paying stocks may be a better option for you.
It is important to note that all investments carry risk, and there is no guarantee of future returns. You should always consult with a financial advisor before making any investment decisions. Paycheck to Wealth is here to help. Please contact Paycheck to Wealth to learn more.