Dividend and growth investing are two of the most common investment styles. While both strategies can be effective, depending on the investors' risk tolerance and goals, they also have strengths and weaknesses.
Dividend investing involves buying stocks in companies that pay dividends to generate income from the dividends received. One of the key strengths of this approach is the potential for compound growth. There are two primary methods of dividend payments which are as cash or as shares. Through reinvestment, investors can increase their return through compounding and, ultimately, the overall portfolio return. Another positive of this investment strategy is the potential for "stability". Companies that are known for their dividends are often mature businesses that are established and have a healthy track record of steady earnings. Due to the stability of earnings, this may provide lower volatility than growth-orientated stocks. This investing style can be particularly appealing for investors who are near or in retirement, as it can generate a form of passive income. Sectors often associated with dividend investing include consumer staples, utilities and healthcare. There are also some potential weaknesses to consider regarding dividend investing. One potential risk is the possibility of a company cutting its dividend payments. This can be particularly concerning for investors who rely on the income from their dividends and may not have the time to recover from a dividend cut. Additionally, dividend-paying stocks may not provide the same level of capital appreciation as some growth-oriented stocks, as the focus is on generating income rather than maximising price appreciation.
British American Tobacco (BATS), held within the International High Dividend Vue, is a prime example of a dividend stock. BATS is one of the largest producers of cigarettes in the world, with brands including Dunhill, Lucky Strike, and Kent. In addition to cigarettes, BATS produces other tobacco products such as cigars, snus, and e-cigarettes. The company operates in over 180 countries and has a strong presence in developed and developing markets. The company operates in an industry where its products are relatively inexpensive and may be deemed "necessary". Therefore, earnings tend to be relatively stable, allowing the Group to provide a consistent dividend payment.
The opposing investment style to dividend investing, growth investing, involves buying stocks in companies expected to experience above-average growth. The potential for significant future capital appreciation is one of this style's primary attractions. The rapid capital appreciation for growth companies is typically driven by rapid expansion in its end markets and increasing earnings. This can lead to substantial returns for investors who can identify successful growth companies. Another strength of growth investing is the potential to benefit from technological disruption and innovation. The leveraging of new technologies by companies to spearhead growth and displace existing business models can generate extremely healthy returns for investors. Disruption by new technologies can take place on both sides of the supply and demand equation. Sectors often associated with growth investing include technology, healthcare, and consumer discretionary. Likewise to dividend investing, there are potential weaknesses regarding growth investing. Increased volatility is often associated with growth-oriented stocks. These companies may experience significant price fluctuations as they navigate the challenges of rapid expansion and may not be as stable as some dividend-paying stocks. Growth investing can be more challenging for those seeking a reliable source of income, as these companies may not pay dividends or may have inconsistent dividend payments.
Tesla, found within the Car of the Future Vue, is a prime example of a growth stock.
Tesla is an American multinational corporation that designs, manufactures, and sells electric vehicles, renewable energy storage, and solar panel products. The company disrupts traditional automakers through artificial intelligence, innovative manufacturing, and battery technology. While seeking to increase its scale, the Group will continue to utilise its technology to drive further business efficiencies.
When assessing companies as potential investments, specific characteristics can make them a good fit for either of the previously discussed investment styles. Companies with robust financial health, consistent earnings, a history of dividend growth and dividend yield will be suitable for the dividend strategy. On the other hand, companies possessing disruptive technologies and the potential for rapid earnings expansion will suit the growth investing style investor.
Both dividend and growth can be effective strategies, depending on an investor's goals and risk tolerance. Dividend investing can be a good fit for those who are seeking a reliable source of passive income or for those in or nearing retirement. In contrast, growth investing can be a good fit for those who are looking for significant capital appreciation and are willing to accept the increased volatility that may come with it.
All information contained in this publication is provided on a factual or general advice basis only and is not intended or be construed as an offer, solicitation, or a recommendation for any financial product unless expressly stated. All investments carry risks and past performance is no indicator of future performance. Before making an investment decision, you should consider your personal circumstances, objectives and needs and seek a professional investment advice. Opinions, estimates and projections constitute the current judgement of the author as at the date of this publication. Any comments, suggestions or views presented in this communication are not necessarily those of HALO Technologies, Macrovue or any of their related entities (‘we’, ‘our’, ‘us’), nor do they warrant a complete or accurate statement.
The opinions and recommendations in this publication are based on a reasonable assessment by the author who wrote the report using information provided by industry resources and generally available in the market. Employees and/or associates of HALO Technologies or any of the other related entities may hold one or more of the investments reviewed in this report. Any personal holdings by HALO Technologies or any of the other related entities employees and/or associates should not be seen as an endorsement or recommendation in any way. HALO Technologies Pty Limited ACN 623 830 866 is a Corporate Authorised Representative CAR: 001261916 of Macrovue Pty Limited ACN:600 022 679 AFSL 484264. MacroVue Pty Limited is a wholly owned subsidiary of HALO Technologies Pty Ltd. These companies are related entities with Amalgamated Australian Investment Group Limited ABN 81 140 208 288 (AAIG).