Dividend Stock Versus Growth Stocks | Discover What Fits You Best

One of the best ways to build consistent wealth is to invest in the stock market.

To this end, there are multiple strategies and multiple “types” of stocks. In this article, we will take a closer look at the difference between dividend stocks and growth stocks.

After all, both have unique characteristics, and understanding these differences is important if you want to knowledgeably build a balanced and profitable investment portfolio.

Let's start with dividend stocks.

These are stocks of companies that consistently return a portion of their profits to shareholders in the form of dividends. They tend to be well-established, stable companies with a history of stable profits.

Such companies can be found in sectors such as utilities, consumer goods, health care and financial services.

When is it best to choose dividend stocks?

Do you enjoy receiving regular income from your invested assets? Then dividend stocks might be the right choice for you!

Companies that pay dividends are often less volatile because of their stable business models and already proven financial performance, making them somewhat less sensitive to economic fluctuations.

Moreover, if the share price rises, such stocks will provide a double source of income! On the one hand, you will receive the dividend, and on the other hand, you will have the prospect of additional returns due to the stock price increase.

However, the main reason for choosing dividend stocks remains the stable cash flow.

Re-investing dividends.... Yes or no?

Reinvesting dividends in the same stock can be an excellent way to benefit from compound growth, especially if you are confident in the company's long-term prospects. Over time, this can significantly increase the total return on investment.

Just be sure to avoid overconcentration in one stock. After all, by doing so, you increase the risk because the performance of that one company can have too great an impact on the return of your overall stock portfolio.

Consider dividend stocks if:

• You are looking for a regular income stream.
• You prefer less risk and more stability.
• You want to reinvest dividends for compounding gains over time.

What to look out for when selecting dividend stocks?

The biggest mistake novice dividend investors make is to consider only the dividend yield (the ratio of the annual dividend paid to the current stock price). A dividend yield between 3% and 6% is generally considered healthy.

Yes, there are many stocks that offer much higher dividend yields but such a high yield can indicate problems within the company. A sharply falling stock price, for example, will greatly increase the dividend yield....

Ultimately, the goal is to select dividend stocks from financially sound companies with strong balance sheets where there has been a reliable dividend payout for a long time. In doing so, prefer steady dividend growth rather than focusing on (too) high dividend yields.

Next to or below this article, you will find several links to other articles and videos that discuss this in more detail.

Be sure to check out our trading ideas page where there are several predefined dividend screens available that you can use when searching for specific dividend stocks. All of these screens can be modified and saved as you see fit.

Or should we opt for growth stocks anyway?

In contrast to dividend stocks, growth stocks will represent companies that do not distribute their profits in the form of dividends but seek to reinvest them as much as possible into the company itself to fuel growth. You will usually find these companies in sectors such as technology, biotechnology or other emerging industries with significant growth potential.

Growth companies focus specifically on increasing their market share, innovating new products or entering new markets rather than paying dividends.

The source of the potential high returns in growth stocks is entirely focused on exponential capital growth, being stock price appreciation over time. However, that opportunity for high returns also has a downside. Growth stocks tend to be a lot more volatile and risky than dividend stocks.

This makes sense, as such companies tend to operate in rapidly changing industries with stiff competition.... Market sentiment and the accompanying sometimes considerable short-term price changes, both positive and negative, are specific to these types of stocks.

Innovation and Disruption

Growth companies are often at the forefront of innovation. They are involved in creating new technologies, disrupting traditional industries or providing solutions to global challenges. For investors who want to be part of pioneering industries, growth stocks are the best choice.

Consider growth stocks if:

• You are willing to take on more risk for the potential of higher returns.
• You have a long-term investment horizon and can tolerate volatility.
• You want to invest in companies with potential for rapid growth and innovation.

What to look for when selecting growth stocks?

One of the most important indicators of a growth stock is revenue growth. Look for companies that show consistently high growth in revenue, often above the market average.

This shows that the company is attracting more customers, entering new markets or successfully expanding its products and services. Check both quarterly and year-over-year revenue growth to see if the company is able to sustain it.

The focus on revenue growth is primarily because many start-ups may not yet be making a profit. However, it is important that there are clear signs that the company is moving toward profitability. Rising profit margins are a good indication of this.

Keep in mind that sales growth is the basis for better profit margins, efficiency gains and savings are measures that have a short-term effect but are not sustainable in the long run.

Our trading ideas section features many screens specifically designed for finding potentially strong growth stocks.

Through this link, you can discover the parameters by which well-known growth investors such as Mark Minervini, Peter Lynch and William O'Neil (CANSLIM) look for typical growth stocks.