EspressoLogy

The primary difference between a growth and dividend stock arises from the decisions made by the management. When a company makes a profit, it can either reinvest it back in the company or distribute it in the form of dividends.

If the management believes that the company has a scope of expansion and opportunities, it may not distribute dividends and will instead opt to reinvest them in the company. Well-established companies that generate consistent revenue may prefer to pay dividends to reward existing shareholders or get new investors. Companies may also follow a hybrid strategy when it comes to profit distribution, i.e., they may pay a part of their profits as dividends to shareholders and reinvest the rest back in their business.

What is the right strategy for you?

Before selecting stocks for the portfolio, an equity investor must assess their risk-taking capacity - are they risk-averse, risk-neutral or risk-seeking.

A person is said to be risk-averse if they would accept a guaranteed payment instead of taking a risk and possibly earning more or nothing at all. If they are indifferent between the bet and the guaranteed payment, they are risk-neutral. Meanwhile, a risk-seeking investor would more often than not prefer the bet over the guaranteed payment.

For a conservative investor, a low-risk strategy that follows wealth protection can be ideal. Hence, they can look into dividend stocks. Meanwhile, an aggressive or risk-seeking investor seeking rapid growth by capital appreciation can consider growth stocks.

What does each offer?

A dividend-paying stock is ideal for investors seeking consistent cashflow and stability in price. However, if you do not rely on dividends as a source of income, you can opt for growth stocks as they offer higher returns in the form of capital appreciation.

Return on investment

Returns from a dividend-paying stock can be classified into two categories - capital appreciation and dividend. Meanwhile, growth stocks only have the component of capital appreciation.

Type of companies

Companies that pay dividends are usually well-established businesses that generate consistent revenues. On the other hand, growth companies are relatively less established and are still in their growth phase wherein they will benefit more from reinvesting profits rather than distributing it among shareholders.

Volatility

Dividend stocks are usually less volatile than growth stocks. This is because the regular dividend payments received by the shareholders represent consistent cash flows received from their investment in the stock. Also, once a company begins paying a regular dividend amount it will generally continue doing so. This is because the stock market reacts very poorly to stocks that reduce their dividend payments. This gives investors high confidence that the dividend payments will continue indefinitely at the same amount or greater; thereby reducing volatility

How do they fare in a bear market?

Given the low volatility, dividend stocks usually remain consistent in bear markets as they consistently pay dividends even if there is no capital appreciation. On the other hand, growth stocks can witness massive whipsaws in price due to their high correlation to the prevailing market conditions.

For an equity investor choosing the right strategy can be critical in achieving their financial and investment goals. As an investor, one must assess their risk tolerance and future needs for capital before selecting stocks for their portfolio.

Also, the strategy you choose should not be static and should be reviewed periodically as circumstances in the market change.

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Please refer the Risk Disclosure Document issued by SEBI and go through the Rights and Obligations and Do’s and Dont’s issued by Stock Exchanges and Depositories before trading on the Stock Exchanges. Brokerage will not exceed the Exchange prescribed limit.