"Dividend Stocks" vs "Growth Stocks": Which Should You Go For?

In a market filled with so many companies and stock tickers to choose from, a qualifying question that will inevitably come up is: "What is this company's dividend payout policy?" On the surface, it's a no-brainer. Afterall, dividends mean you're getting free money for investing in a company, so why not? Unfortunately, it's not so simple. There are considerations to be made when considering to invest in a company that pays out dividends.

Some sit on the opposite side of the fence, going for "growth stocks". Although definitions vary, a "growth stock" is one that is expected to grow at a higher rate than the broader market indexes, and typically does not payout dividends. Why no dividends? "Growth stock" companies re-invest would-be dividends and excess income back into the business, which supposedly bolsters its growth.

So which is right for you? Let's take a look at a number of considerations.

Disclaimer: All investments should be done with your own due dilligence. This post is my personal opinion and should not be taken as absolute investment advice.

What is your Investment Runway?

Every investor is different. Everyone is at different life stages, different income streams, different commitments, different amount of dependents etc.

An important consideration is to look at how long is your investment runway? Are you a student who is just getting into investment? Are you middle-aged and looking for some additional income streams? Are you about to retire? (Don't think any retirees would be looking at my Seedly opinions post for investing advice though!)

For younger individuals in their late teens or early 20s, many feel dividend-paying stocks are not the best option. As a young person in the investment world, you most likely have 30-40 years before you start to wind up your investments and retire. This long runway generally favours growth stocks, which over a long period of time may net you a larger gain compared to dividend stocks.

The risk of these higher potential gains is high volatility, which once again is largely negated by the long runway of being a young person. As a 20-something with not many commitments & dependents, a market downturn will not affect you as badly as someone with dependents and a mortgage to pay off.

On the opposite end, those who are further on in their careers/lives or are close to retiring may favour dividend stocks. This is because dividend stocks are typically less volatile, an important consideration for an individual who is close to retiring. In addition, with a large principal invested in a dividend-paying stock, it can return a tidy-sum through the dividend payments, making it a nice additional income stream.

Dividend Withholding Tax

One of the biggest considerations on whether dividend-based stocks are right for you is the Dividend Withholding Taxes on your investment. A reason that dissuades some Singaporean investors on investing in dividend-paying stocks (especially U.S companies) is the dividend withholding tax of 30%.

This means that should a U.S company pay out $10 of dividends to you, you would only receive 70% of the amount, or $7.

To get around this, some investors choose to invest in Irish-Domiciled ETFs. This would mean investing in the broad US/world market through an ETF that is domiciled in Ireland, such as those on the London Stock Exchange (LSE). Due to Singapore's tax treaty with the UK, the dividends are only taxed at 15%, instead of 30%.

Examples of Irish-Domiciled ETFs include:

• FTSE All-World UCITS ETF (VWRA)
• SPDR MSCI World UCITS ETF (SWRD)

• iShares Core MSCI World UCITS ETF (IWDA)

For some, even the reduced 15% withholding tax of irish-domiciled ETFs is not enough to keep them onboard the dividend-paying stock train. Not every investor is looking to invest in ETFs either, which leaves them either paying the tax of U.S dividend-paying company stocks, or not investing in those companies at all, with many choosing the latter.

A Balanced Portfolio

With those considerations in mind, my personal stance is that a balanced portfolio with both dividend-paying stocks and growth stocks (among other investment instruments) is the way to go. This would of course look different for everyone, as risk tolerance and investing methodology will vary across individuals. It is hence important to ponder the above considerations before making a decision on how much of your portfolio (if at all) should contain dividend/growth stocks.

Common Fallacies to Avoid

For the remainder of this post, I'd just like to include a section to talk about 2 common fallacies and mistakes that one should avoid in dividend investing.

Fallacy #1: Over-focusing on Dividend Yield

"Stock A pays 4% dividends while Stock B pays 3% dividends, hence stock A must be better."

The dividend yield is defined as the amount of dividend a company pays out in relation to its stock price. For investors, this makes for a simple metric to compare dividend stocks. However, it is important not to tunnel-vision and also consider factors such as the consistency/growth of its dividend payouts, and the growth of the stock.

Fallacy #2: Dividend Stocks are Always Safer Than Growth Stocks

Dividend stocks can be incredibly reliable. There are a number of US companies that have been consistently paying dividends AND have been annually increasing their dividend amount (known as Dividend Aristocrat companies), and are generally seen as safe, steady investments. However, a dividend-paying company is not without risk. A company may artificially inflate its dividend payout to appease investors after a period of poor growth.

A real-life example of this is General Motors, who in the mid 2000s raised its dividend yield by more than 10%. However, this was actually because of a rapidly falling stock price, and between 2003 to 2006 the price dropped from $60 to less than $20 per share. General Motors filed for bankruptcy in the 2008 market crash, and had to be rescued by a US-government bailout.

it is hence important to be in-the-know about the company you are investing in. How's its moat? Are there competitors on the rise? How consistent has its dividend payments been? These are just a few of many considerations.

Thank you for reading and all the best in your investment journey!