Growth Or Dividends: What Should Young Investors Focus On?

It’s not as simple as just focusing on dividend or growth investing. What are the fundamentals of the business underlying a stock? It’s important not to overpay for a business. For dividend investing, there are ways to improve the safety of your dividend.

Dividend-paying multi-baggers that are priced for purchase today will be used as examples, including one Canadian Basic Materials company and one U.S. company.

I came across an article written by Financial Samurai (or Sam), who worked in the finance industry for 13 years. The article was titled: Why It’s Better To Invest In Growth Stocks Over Dividend Stocks For Younger Investors.

It takes a lot of capital to generate meaningful income

Sam starts off saying: “Even if you have a $500,000 dividend stock portfolio yielding 3% that’s only $15,000 a year.”

Indeed, there are different ways to double your money. It’s a matter of if you want to focus more on income or growth.

Young people are better off focusing on growth stocks

Sam opines that:

“If you’re relatively young, say under 40 years old, investing the majority of your equity exposure in dividend yielding stocks is a suboptimal investment strategy.”

He continues that:

“Out of the few multi-bagger return stocks I’ve had over the past 16 years, none of them have been dividend stocks.”

Although none of the multi-baggers he owned were dividend stocks, there are always examples if you look for them.

Growth stocks can also pay dividends

Stella-Jones Inc. (TSX:SJ) started paying a growing dividend in 2005. Since then, the stock has appreciated 2,800% – a dividend-paying 29-bagger! Here’s the stock analysis on Stella-Jones.
Starbucks Corporation (NASDAQ:SBUX) started paying a dividend in 2010. Since then, the stock has appreciated 360% – another dividend-paying multi-bagger.

Of course, Stella-Jones and Starbucks were growth stocks to begin with, but just because they started paying a dividend, it doesn’t mean they won’t continue to have good growth.

In fact, from FY2005-2015, Stella-Jones compounded its earnings per share (EPS) at an average rate of 22% annually!

Similarly, from FY2010-2015, Starbucks compounded its EPS at an average rate of 19.8% annually.

When a growth stock starts paying a dividend (especially a growing dividend), it means management believes earnings and or cash flows are stable enough. This is a good sign for long-term investors looking for stable returns.

This is primarily an excerpt from a Seeking Alpha article. You can read the full article here: Is It Better To Invest In Growth Over Dividends For Young Investors?

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Disclosure: At the time of writing, I own shares in SJ and SBUX.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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2 thoughts on “Growth Or Dividends: What Should Young Investors Focus On?

  1. Ken K

    It would depend on what your long term goals are. I do not solely use one investing style and call it a day. For my income replacement goal I use dividend growth and passive income streams. For my accumulating wealth I use value & growth investing. You just need to calculate the rate of growth required to meet your goals and then choose the approach to get that growth rate.

    The hard thing for a young investor is to sit down and think about 10yr, 20yr and 30yr goals.

    1. Passive Income Earner Post author

      Hi Ken, that’s a fair comment.

      For young investors who don’t know what their financial goals are, they can start by figuring out their average spending per month. They can begin by working towards replacing their monthly spending with passive income.

      PIE

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