facebookWhy is dividend investing only suitable for large capital? If you reinvest the dividend, would it not essentially serve the same role as growth stocks? - Seedly



09 Jul 2020


General Investing

Why is dividend investing only suitable for large capital? If you reinvest the dividend, would it not essentially serve the same role as growth stocks?

Discussion (1)

What are your thoughts?

Gerald Ong

Gerald Ong

09 Jul 2020

Full-Time YouTube Educator at www.youtube.com/GeraldOngSL

Hey there! Yes and no, if you reinvest your dividends, technically you would compound your growth because you get more dividends over time too.

But let's take a step back and understand why people even classify stocks as dividend and growth in the first place (a lot of different ways to categorize them so please do research here! because the lines can be arbitrary and super blur sometimes!). Generally, dividend stocks are companies that have proven to be able to consistently pay out consistent dividends for a long periods of time and growth stocks are stocks that are expanding rapidly (more customers, rapidly rising revenues).

The thing is, it is possible that a company CAN be both a dividend stock and yet still grow rapidly. And famed investor Warren Buffett likes company that can grow fast and has a strong moat, and can consistently pay dividends. (Best of both worlds!)

But here's where the difference lies - Getting maximum Return on Investment. Say a 'dividend' stock gives 8% dividend (which is great!) but doesn't grow every year vs a company that grows at 8% a year (which isn't great in my opinion btw!). Which would you invest in? If you want are retired, it makes sense to get the dividend one because you can reinvest some, keep some. But if you reinvest, then there's several downsides like transaction costs especially if you've a SMALL Capital(e.g min $20 brokerage fee when your dividend is like $25), the delay in investing, because dividends are paid once per year and the additional manual labor of having to reinvest it (imagine you have 30 dividend companies paying dividends at different times!). This will likely eat up quite a bit of your gains and this is probably why you hear people saying dividend investing is only suitable for large capital.

Growth stock on the other hand doesn't give cash, and it is wayyy harder to estimate growth rate and often times, growth stocks are priced at a high price to account for it's 'potential' growth speed, but it can grow quickly! Put money and you'll just need to monitor the company's performance (Less admin, low value work). But if you need money, it can be hard to liquidable especially if you own a small number of shares! Again, high cost of selling shares, e.g a $20 DBS lot (100 shares)+ $20 transaction fee means you get a 2% transaction fee for taking money out!

Now back to you, what would you invest in? It's actually possible to have both btw! If you found this helpful, please show some love over at my channel cause it GREATLY affects my dividend income!

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