Growth Vs Dividend Stock: Which Is More Profitable?

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Growth Vs Dividend Stock: Which Is More Profitable?

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 Growth Vs Dividend Stock: Which Is More Profitable?

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Summary

  • A growth stock is characterized by re-investment of accrued profits for faster growth in the medium to long term
  • Normally a growth stock trades at a price higher than the P/E ratio
  • Amazon is an example of a growth stock

As a first-time investor in the stock market anywhere in the world, one of the burning questions that stare at us is whether to invest in stocks that pay a dividend (value stock) or those which does not pay dividends (Growth stock).

So, let's get some of the concepts clear right ahead:

What Are Growth Stocks?

A growth stock is the share of a company that is expected to grow at a rate greater than ordinary or prevailing market rates.

These companies do not pay any dividend to the shareholders. On the contrary, they reinvest any profits they might have earned within the company to accelerate growth opportunities in the short term.

As a holder of growth stock knows or is aware that his primary source of wealth creation is through capital gains. Example – Amazon

Any industry or sector may have growth stocks and they typically trade at a higher price to earnings ratio(P/E). This essentially means that they may not have earnings at present but have a bright prospect in the future.

An investor of growth stock can only earn money if they sell their shares at the time of exiting the investment.

 

How To Identify Growth Stocks?

 

Some of the common traits of good growth stocks are their unique product lines for which they may hold patents, have access to technologies that put them ahead of their peers in the industry.

In order to stay ahead of the competition, whatever profits they accrue is reinvested either to buy more sophisticated technologies that aids in research and development of more refined product lines and customer service.

It is because of these trends that they have a loyal customer base and a significant market share in the industry in which they operate.

@Kalkine Media 2021

 

What Are Value Stocks?

Value stocks are those companies that are underrated by the market. Investors gain value by way of dividends paid by these companies, the share price of which often trades below the PE ratio.

Value stocks usually belong to companies that are mature, larger, and more established.

For example, by dividing the number of outstanding shares by the market capitalization it is found that the book value of a share is $25 but it is trading at $20 apiece currently, then according to many analysts it is a good value play.

There are many reasons for a stock to trade at a rate that is undervalued such as public perception or involvement in a scam by the company or any of its representatives constitute some of them.

Value Or Growth: Which Is Better?

A major point of difference between growth and value stocks is that value stocks (i.e., companies that pay dividends) outperform in bearish market conditions or periods marked by an economic recession while growth stock tends to excel during bullish conditions and economic expansion.

Both options of growth and value investment are dynamic concepts. The decision is entirely that of the investor based on his risk tolerance level, investment goals, time horizon, etc.

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