We invest our income with the ultimate objective of trying to maximize our total returns. There are two prominent methods of investing your income, to increase your total returns. In this article, we examine both sides of this returns story and find out which is most suitable for you based on a few factors.
The Returns Formula
Total Returns = Capital Appreciation (Growth) + Dividend Yield
- Capital Appreciation (Growth): Earnings and price of stock increase above market average
- Dividend Yield: Quarterly or Yearly cash payouts for your investment in the company based on performance
Dividend Investing
A strategy that involves building a collection of safer blue-chip or dividend paying stocks. Investors will then enjoy getting to enjoy the returns in form of regular cash deposits into their respective brokerage account.
Pros
- Investors receive regular returns in form of dividend payouts. This dividend payouts can be reinvested.
- Singapore’s biggest Index stocks have the highest dividend yield in Asia at 3.7%.
- Dividend-paying stocks have a better track record of performing better when market condition is weak.
- Price of dividend stocks are less volatile, which means lesser risk
Cons
- A large amount of capital is usually required from investors, as the stock price is high.
- Since price is less volatile, increase in stock price is lesser than growth stocks. In other words, some investors may find it boring.
- Dividend payments are not carved in stones, companies can reduce dividends anytime if there’s a reason to.
Possible Investment Instruments: High-yield dividend stocks, Business trusts, and REITs
Growth Investing
Growth investing refers to a strategy where investors invest in companies whose earnings are expected to increase at a rate that is above the market average. This is in hope of making returns through an increase in price or value of vested stock in future.
Pros
- Investing in the right company can increase your returns at a rate which is higher than that of the overall market.
- The possibility of getting higher returns than dividend stocks in the short run.
Cons
- No dividends will be given out to offset investor’s risk, as the company tend to reinvest their earnings.
- Volatile stock prices
- Exposed to higher risk
Possible Investment Instruments: Growth stocks, stocks of smaller companies or emerging markets
Dividend Investing VS Growth Investing
Growth and dividend stocks differ in certain ways. This is mainly due to investors having expectations that growth stocks will one day have the possibility of generating high capital gains, while dividend stocks are usually old companies that are stable and less innovative.
| Growth Investing | Dividend Investing |
|---|---|
| Companies that exhibit signs of above-average growth. | Dividend-paying stocks |
| Good potential | Good financials |
| Do not pay out dividends | Good track record of dividend payouts |
| Often overvalued | Often undervalued |
| Expensive price-to-book ratio | Low price-to-book ratios |
Which one should I pick?
There will always be an ongoing argument on which method gives a higher return. Each school of thought will also be able to provide evidence to back their argument too. Unless you are a seasoned investor, a diversified portfolio consisting of both growth and dividends stocks will be the safer way to do so. The decision on the percentage % of dividend stocks and growth stocks lies on a few factors:
Factor 1: Age and Risk Profile
Younger investors tend to have higher risk appetite and go for long-term capital growth, hence a portfolio with a higher percentage of growth stocks. On the other hand, investors close to retirement tend to go for consistent income and hold a higher percentage of dividend stocks.
Factor 2: Economic conditions
Dividend investing is popular when the economy is facing uncertainty or slower growth. Growth stocks generally perform better when interest rates are falling and company earnings increase.
Factor 3: Company news and performance
Ultimately, there is a company behind every stock and the company’s news and performance affects the price of a stock.
Extra Tools: Investment Moats Singapore Dividend Stock Tracker
For Singaporeans who are interested in dividends investing, we are really lucky to have Investment Moats High Dividend Stock Tracker to keep an eye on high dividends yielding stocks.
Additional Reading:
An illustration of the growth of $1 from year 1927 to year 2005, if one invest in various stocks. Do note that value stocks refer to dividend stocks in this case.
A $1 investment in 1927 would have grown to:
- $7,662 in year 2005 if placed in large value stocks
- $54,966 if placed in small value stocks
- $974 if placed in large growth stocks
- $1,371 if place in small growth stocks
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