When a company earns a profit, it has two options- either to reinvest the earnings in growth opportunities like most of the growth stocks do or to distribute the earnings to its shareholders to make them happy.
An investor can develop a likeness for either of these type of stocks i.e., Growth stocks or Dividend stocks, based on his/her nature of investing, investment goals, risk appetite, investment strategy, market scenario and many more factors.
In a country like Australia, where interest rates are kept at record low levels by the Central bank, dividend stocks have become increasingly popular among investors. On the other hand, in US where many technology companies are flourishing at an increasing pace, investors are more inclined to invest in companies which are expected to grow at a rate significantly above the average for the market.
As 2019 is coming to an end, we have screened few growth and dividend stocks for 2020. Few of these stock are discussed below.
Let us now discuss the benefits and drawbacks of these type of stocks.
High Dividends V/s Company’s Growth
As we all know that a dividend is a share of a company’s earnings that is paid to the shareholders and is not reinvested in the company’ growth. This means that if a company intends to pay fat dividends to its shareholders, it is coming at the cost of the company’s growth.
We have seen that many companies which reinvest their earnings for growth purposes are able to increase shareholders’ wealth over time.
Let’s take an example of iCar Asia Limited (ASX: ICQ), ASEAN’s leading network of automotive portals. Last year as well as in the first half of this year, the company witnessed significant growth in its revenues. Despite this, the company is still incurring losses and not been giving dividends to its shareholders, but over the period of last 1 year, the company has tripled its shareholders’ wealth. In the last one year to 10 December 2019, ICQ stock price has risen 150% on ASX.
As a result of consistent positive EBITDA margin growth in Malaysia and Thailand where the company has been operating successfully, ICQ reached EBITDA breakeven in November 2019, one month ahead of earlier guidance. The company has predicted that Calendar Year 2020 will be a solid year for iCar Asia with revenue currently expected to increase by 50 per cent, underpinned by the consistent growth of the company’s core businesses, as well as the contribution of the Carmudi business.
Another growth stock which has done wonders in increasing shareholders’ wealth is ZIP Co Limited (ASX: Z1P). This fintech stock has risen by 266% in the last one year to 10 December 2019. This company is known for making significant investment in its technology and data science teams and has not paid any kind of dividend to its shareholders.
Z1P Financial Dashboard
Note: Financial year end at 30 June of each year (Image Source: Company Reports)
Z1P recently announced the completion of upsized placement, raising $60 million to be used predominantly to:
- fund Zip’s global expansion into the UK market;
- increase investment in product and technology;
- expand Zip’s product range including the launch of Zip Biz;
- strengthen Zip’s balance sheet.
The above-mentioned growth stocks are great examples of how investment in these type of stocks can significantly increase wealth over time. But one must note that this is not the case with every stock. Many growth stocks do struggles to provide decent returns to its shareholders and sometimes even fail to provide any return or provide negative.
Consistent Cashflow V/s higher returns
Although growth stocks may be riskier than any blue-chip stock, but they have more potential to provide higher returns to investors. On the other hand, dividend stocks provide steady cash flow to investors, making them more secure in the eyes of investors. There are dividend stocks which have been paying fat dividend to shareholders but are struggling on exchanges.
Let’s understand this by taking few examples-
National Australia Bank Limited (ASX: NAB) is currently one of the leading bank of Australia with a market cap of around $72.16 billion. For the year ended 30 September 2019, the bank reported a statutory net profit of $4.80 billion and cash earnings of $5.10 billion. Including the interim dividend of 83 cents per share, the total dividend for the year was $1.66 per share, 32 cents lower than last year. At a market price of $24.940 as at 10 December, NAB has an annual dividend yield of 6.63%. Looking at the stock performance, in the last one-year NAB’s stock has only provided a return of 7.01%.
One other leading bank of Australia, which is known for having high dividend yield is Bank of Queensland (ASX: BOQ). In FY19, BOQ reported a statutory net profit after tax of $298 million and cash earnings after tax of $320 million. Due to the challenging environment, particularly in the last six months of FY19, BOQ’s total dividend for FY19 was reduced by 14% to 65 cents per share. But still, the bank has a high dividend yield of 8.9%, calculated at a market price of $7.3 on 10 December 2019. While the bank has an impressive dividend yield, it continues to struggle at the exchange as the stock has declined by 22.59% in the last one year.
When it comes to growth stocks which have provided higher returns to investors, one stock that pops in mind is Tesla. This electric vehicle manufacturer is not known for paying dividends to its shareholders but for reinvesting its earnings in Research and development of its products and other growth purposes. While doing this, the company has significantly increased the wealth of its shareholders. In the last five years, TESLA has increased shareholders’ wealth by 58.31%. The stock last traded at USD 348.84 on NASDAQ.
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