Growth Stocks or Dividend Stocks

An investor enters the market with the obvious intention of accumulating higher returns and booking massive profits. For this, they invest in various types of stocks that are trading in the market. In this article on Growth stocks or Dividend stocks, we will take a look at the two most famous types of stocks. Keep reading to find out!

What are Dividend Stocks?

Before we look at how having dividend stocks can boost your portfolio, it is important to understand what dividends are. For investors, dividends are one of the best sources of passive income.

Dividends are part of the company’s total profits that it decides to distribute among the shareholders instead of reinvesting it in the business. They generally give out dividends as rewards to investors for providing capital to the company.

Dividend stocks are the category of stocks that have a consistent record of paying out dividends to their shareholders. They have been consistently paying dividends for years.

As an investor to select the best dividend-paying stocks you should consider metrics such as the dividend yield and dividend payout ratio of the company.

The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company. While the dividend yield shows how much a company pays out in dividends each year relative to its stock price.

Why should you invest in Dividend Stocks?

Dividends are generally paid by companies that are well established and have a strong foothold in the industry. This makes them a less risky investment. However, since these companies have achieved maturity they have lesser growth potential than growth stocks.

Investing in dividend stocks will also be a source of passive income for the investor. Along with the benefit of value appreciation, the investor will get the added benefit of dividends.

Further, the income earned from the dividends can be reinvested in the same stocks to earn a return. This is called dividend compounding.

Along with the benefits mentioned above, other investing in dividend stocks can also act as an inflation-proof investment. A dividend yield higher than the inflation rate can be an effective way to earn a steady income.

Examples of Dividend Stocks

What are Growth Stocks?

Now that we have a sound understanding of dividend stocks, let us move on to growth stocks. A growth stock in general is the share of any company that is expected to grow at a rate that is higher than the average growth rate of the market. 

Unlike dividend stocks, growth stocks do not distribute part of their profit to the investor. This is because these companies tend to reinvest the profits in the business. This drives the growth of these stocks.

Another metric used to analyze whether a stock is a growth stock or not is the Price-to-Earnings (P/E) ratio. A PE ratio shows what the investors are willing to pay today for a stock based on its past or future earnings. As growth stocks are expected to have high growth potential, these stocks can be considered overvalued.

Why should you invest in Growth stocks? 

The stock price of a company is majorly driven by factors such as the revenue earned and net profit reported by the company. A positive number drives the price upward and vice versa. Therefore, an investor has the scope of earning large capital gains if the growth stocks have positive financials.

One of the characteristics of these stocks is that it grows with time as their business expands. That is the reason why an investor holds these stocks for a longer time horizon. This gives a benefit of taxation as the Long term capital gains have a lower rate.

As per market experts, these stocks tend to have a growth rate that is considerably higher than the inflation rate in the longer run. This increases the purchasing power of the individual thus improving the standard of living. 

Examples of Growth stocks

In closing

In this article, we looked at two of the most important types of stocks that are trading in the Indian stock market. Dividend stocks are based on the dividend yield of the company. Whereas growth stocks are categorized based on past returns and future expectations. However, it must be noted that before investing in any stock an investor must look at other metrics as well. That’s all for this post! Happy Investing!

Which type of stocks do you invest in? Let us know in the comments below.

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