- In this video, we'll go through
dividend versus growth investing
to uncover which one is better to invest in.
I also back-tested a few growth and dividend portfolios
to get some real life data that I'll share with you as well.
If you're anything like me though,
then the simple response to this is who cares,
I'm just gonna continue buying my index fund ETFs
and move on with my life.
In that case, don't worry because with something
like VTI and VOO, you're investing in both growth
and dividend stocks.
Hey, I'm Jarrad and on this channel,
we like to talk about personal finance, investing
and financial independence.
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I'll make a bold statement in some people's eyes
right off the rip before we get into it.
If you're under the age of 45
or still in the wealth accumulation phase of life,
then focusing on building up a large dividend portfolio
could hurt more than it helps.
In some cases I could even argue
that you're better off avoiding dividend stocks
until you're retired and not working any longer.
To explain why that is,
we first need to understand why a business
would even bother paying out a dividend in the first place.
Companies don't just pay dividends for fun.
I know we like to pretend like they do it
out of the goodness of their hearts,
but they could care less about making us feel
all warm and fuzzy inside through regular dividend payouts.
They do it because they've come to a point
in their business life cycle,
where they have too much cash on hand
that they don't have anything more productive to use it for.
Because of that, they can do one of two things
with that extra cash, that'll return some value back
to shareholders.
The first thing they can do is buy back shares,
which will automatically increase the stock price
and benefit you as a shareholder of that stock.
Because you know, when there's less available shares to buy
the shares that are left, become a lot more valuable.
Or number two, pay out a one-time or ongoing dividend,
which technically decreases the share price by that amount
but will at least put cash in the pockets of shareholders.
Generally, when a company pays out a recurring dividend
they're signaling to the world that their financials
and projected income are healthy enough to commit
to that scheduled payout.
When you receive a dividend payout
from a stock that you own,
that's the company's way of saying,
here you go, take this money, do something with it
because we don't have any better use for it.
You could probably find a better place to put it
that can get you a higher return on investment than we can.
It's not necessarily a bad thing
that the company can't find a better way to use that money
to grow the business,
they might just generate so much money
that they don't know what to do with it all.
So instead of investing it into something
that might not be worth the payoff,
they reward their shareholders through a dividend payout.
On the other hand, a growth company
is focused on one thing and one thing only, growing.
And to do that, they need money, lots and lots of money.
This is why they'll never pay out a dividend
or even pay out a very, very tiny dividend.
Inside Apple with their cute little baby dividend
of 0.59% even though they have more cash on hand
than a ton of countries and continue to grow
at astronomical rates.
If you were a shareholder of a company like Tesla,
then the last thing that you'd want them to do right now
is pay you a dividend.
That's because the more money
that comes off their balance sheet to pay shareholders
in the form of a dividend, the less that they have on hand
to pump back into the business to grow it.
Not only will growth companies like Tesla
not pay out a dividend to preserve cash,
but they'll also take on debt or even issue more stock,
which in turn will dilute their current shareholders
to gain access to more money,
to hopefully grow the business.
Fun fact, since 2010, Tesla has more than doubled
their shares outstanding from 400 million shares
to 1.1 billion shares, ouch!
Diluting current shareholders by issuing more stock
isn't necessarily a bad thing as long as they use
that additional cash in a productive way
that will eventually pay off for the owners of their stock.
Having extra cash on hand to be deployed within the business
is like fuel for a rocket ship if used properly.
In turn shareholders of these growth stocks
are expecting to be paid back
through an increase in price per share of the stock,
as opposed to through a regular dividend payout.
The downside of this is because a growth company
is sprinting full speed, 24/7, there's a possibility
that they'll burn out before even getting
to the finish line.
If they don't completely burn out,
then the expected growth might never be achieved,
which will eventually tank the stock price.
Let me be clear about the whole stock price growing thing.
I am by no means trying to imply that
a company that pays a dividend won't grow its stock price.
I'd hope it does or else
we're gonna have some real problems.
But what I am suggesting is that as a whole
dividend stocks will most likely underperform growth stocks
over the longterm.
I ran a backtest with a high dividend yield ETF, growth ETF
and a total stock market ETF, each investing $10,000.
The returns give you an idea
of how things have played out so far
with all dividends within each portfolio being reinvested.
The high dividend yield ETF brought up the rear
with an 8.4% average return and a portfolio balance
of a little over $33,000.
The growth ETF had an annual return of 13.4%
with the portfolio balance of a little over $64,000.
And the total stock market ETF saw on average annual return
of about 10.6% with the portfolio balance of $44,800.
The high dividend yield portfolio
lagged behind the growth portfolio by 5% and $31,000.
It even lagged behind a total stock market ETF
by 2.2% and almost $12,000.
Keep in mind that we've been in a bull market
over the past 12 or 13 years,
which has definitely benefited the growth stocks
more than the dividend stocks.
When the market eventually turns, whenever that is,
growth stocks are going to get destroyed,
which could easily reduce their average return
down closer to those higher dividend paying stocks.
But the good news for growth stocks is that
if the past 30 years are any indication of the future,
down years don't happen very often.
Yes they happen and when they do it is ugly.
But in the grand scheme of things,
it's a small blip in the radar.
This alone isn't the only reason to invest in growth stocks
or dividend stocks though.
The answer to that question has more to do
with where you're at within your investing life cycle.
High dividend paying stocks are great for people
looking for immediate income.
Growth stocks paying very little to zero
and dividends are good for people
who are looking to grow their investments at a faster rate
and don't need income from their investments
within the next five to 10 years.
If you're young and in the accumulation phase of investing.
So roughly under the age of, we'll say 40 to 45,
then building a large portfolio
of high dividend paying stocks
is an inferior way of investing your money.
Why trade the lower potential returns
from dividend paying stocks to get immediate income
that you don't need because you already have a job
paying you an income today.
When in reality, you could be focusing more on growth
with higher potential returns
to build up a larger chunk of money.
It just doesn't make mathematical sense
for someone who is younger, nowhere near retirement
and doesn't need to preserve their investments.
One thing a dividend investor might say
is that since they can reinvest their dividends,
they can immediately buy more shares
of those dividend paying stocks
to continue to increase their position,
which will increase their dividend payments.
That's a fair enough response,
but that doesn't change the fact that
the stocks that you buy will continue
to underperform growth stocks.
You're better off just buying more growth oriented stocks
when you don't need the income to grow your portfolio
larger than the dividend portfolio.
Then once you need the income,
you can buy into those high dividend paying stocks
with even more money than if you had stayed invested
in the high dividend paying stocks from the very beginning.
In the backtested example that I went over a minute ago,
starting with a growth portfolio,
then moving to a dividend portfolio
would have given you $28,000 more
to buy more high dividend paying stocks later down the line.
I think psychologically,
dividends are very appealing to young investors
because of the passive income aspect of them.
Yes, it's possible to build up
a big enough dividend portfolio,
to where could eventually replace the monthly income
from your career.
To be honest, it sounded so appealing
that it led me down the path of doing more research
to figure out if it was the route
that I wanted to be taking with my investment portfolio.
And ultimately came to the conclusion
that I'm too young to be messing with that path of investing
at this point in time.
Even though some of them are more optimal than others
at different ages and life stages,
I could care less if you invest in high dividend stocks,
growth stocks or total stock market ETFs.
What I care about more is that
you're actually investing consistently
with some sort of process in place.
If building a dividend portfolio does that for you
then by all means, go for it.
I know a lot of smart people who love dividend investing,
two other YouTube creators, who I'm good friends with,
Brad Finn and JJ Buckner
are both big on dividend investing.
Yes, they also invest heavily into index funds like me,
but they also enjoy building dividend portfolios as well.
I'll have links to check their channels out
into the description if you're interested.
I actually think that JJ is currently in the process
of building some sort of a dividend tracker.
So go check them out,
if you're interested to learn more about that.
Either way, I'll be over here on the sidelines,
waiting for you to continue pumping money
into the stock market,
no matter what your investment method of choice is.
Watch these financial independence and investing videos
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I'll see you in the next one, friends, done.