Difference Between Dividend vs Growth
The difference between Dividend vs Growth stock arises due to the decisions made by the management. When the company makes a profit it has two options, either return it to the investors in the form of dividend and the second is to invest it back in the company
The company that believes that they will generate higher returns by investing in the company compared to what they might have got in other investments do not pay dividends. There are also companies that have just started and have the scope of further expansion and opportunities. On the other hand, dividend-paying companies are mature and stable and believe that future growth is limited so they rather pay the investors and find better opportunities to invest
Because of these differences, both these types of companies attract different types of investors who have different investment objectives. Investors are differentiated based on the risk capabilities Risk seeking, Risk-neutral, and Risk Averse. Risk-seeking investors opt for growth companies while risk-averse investors opt for a Dividend stock. Risk-neutral investors may have a portfolio that is a combination of both or portfolio comprising of only dividend stock or only growth stock
Head To Head Comparison Between Dividend vs Growth (Infographics)
Below is the top 9 difference between Dividend vs Growth
Key Differences Between Dividend vs Growth
Both Dividends vs Growth are popular choices in the market; let us discuss some of the major Difference Between Dividend vs Growth
- The classification of a company is dividend or growth is determined by the way it treats profits. Companies that invest the profit back in its operations or expansion are considered to be growth companies. Companies who on the other hand pay out dividends to their investors rather than investing in their operations are considered to be dividend-paying companies
- Dividend stocks offer stability and consistent cash flows while growth stocks give higher returns and meant for investors who are young and also for investors who do not need money immediately
- Risk-seeking investors usually opt for growth stocks as there is high volatility involved and is prone to market cycle on the other hand risk-averse investors opt for dividend-paying stocks as the risk involved with these stocks are limited
- Dividend-paying stocks are usually established businesses that can predict their cash flows and can also increase the share they return to investors from their profit. Growth stock companies are usually less established. They invest all the profits in the company and are still in the growing phase
- Investors investing in dividend stock usually fall under the ‘Value Investing’ method while Investors who invest for capital appreciation fall under ‘Growth Investing’
- Dividend stocks provide both capital appreciation as well as dividend. Growth stocks usually never pay a dividend and only have capital appreciation
- Dividends stock usually perform even in bear markets as they consistently pay dividends even if there is no capital appreciation. Growth stocks perform poorly in bear markets as the stock price tumbles down and investors also do not receive dividends
- Value investors look at stocks that have prices lower market price than the intrinsic value. Growth investors usually do not care about intrinsic value as long as the price of the stock keeps rising
- Dividend yield, the payout ratio is the ratio that dividend investors usually look at before investing. Growth investors look at PE ratios, EBITDA growth, PAT growth before investing, Both these ratios, however, look at the companies performance to peers
- Examples of high dividend-paying companies in the Indian market are Vedanta, Infosys while growth companies are Eicher Motors, Hindustan Unilever, etc.
Dividend vs Growth Comparison Table
Below is the 9 topmost comparison between Dividend vs Growth
|Basis Of Comparison||Dividend stock||Growth stock|
|Offer||Dividend stocks offer stability and consistent cash flow||Growth stocks offer higher returns and are usually for investors who do not currently need money|
|Risk/Volatility||Dividend stocks are less volatile and are for the investors who have less risk tolerance||Growth stocks are very volatile and are very risky. They are for investors who are risk seekers|
|Investors||Investors investing in dividend stock usually fall under the ‘Value Investing’ method||Investors who invest for capital appreciation fall under ‘Growth Investing’|
|Upside||The upside to dividend stocks are both capital appreciation and cash flows||The upside to growth stocks is only capital appreciation|
|Type of Companies||Dividend-paying stocks are usually established business that can predict their cash flows and can also increase the share they return to investors from their profit||Growth stock companies are usually less established. They invest all the profits in the company and are still in the growing phase|
|Performance in Bear Market||Dividends stock usually perform even in bear markets as they consistently pay dividends even if there is no capital appreciation||Growth stocks perform poorly in bear markets as the stock price tumbles down and investors also do not receive dividends|
|Intrinsic Value||Value investors look at stocks that have prices lower market price than the intrinsic value||Growth investors usually do not care about intrinsic value as long as the price of the stock keeps rising|
|Ratios||Dividend Yield, payout ratio are the ratios that value investors will look at||Considering it to be a growth stock the earnings are higher, and therefore these companies trade at a high PE ratio|
|Examples||Vedanta, Infosys||Hindustan Unilever, Eicher motors|
Selecting the type of stock depends on the investment style, age group, goals, and income. A young investor can invest most of his money in high growth stocks because a young investor has a long career and has a long time to recover from market fluctuations.
If the investor develops a good portfolio at the beginning of his career, it will have an exponential effect on the portfolio size when he is old. As the investor grows old he can transfer the growth portfolio to a stable dividend portfolio to reduce the blow in case of a market turmoil.
However, these are not the fixed mantra for investing. An investor may have a combination of both Dividends vs Growth stocks even when he is young or an investor at very old age may have a portfolio comprising only of growth stocks. This type of portfolio depends on the type of investor and his objectives and income.
This has been a guide to the top difference between Dividend vs Growth. Here we also discuss the Dividend Stock vs Growth Stock key differences with infographics, and a comparison table. You may also have a look at the following articles to learn more.