When it comes to investing, there are plenty of questions that come forth. It’s like an endless ‘hows’ and ‘whys’ about stock investing. One such query is whether to go for the growth stock or dividend stock. There are different types of stocks based on various parameters and growth stocks and dividend stocks are one of those. These two stocks are basically categorized on the basis of dividend payment and are pretty simple to differentiate them.
But merely differentiating them isn’t enough as the burgeoning question is which one of them is a better prospect. So here we are to look into these stocks and form a comparative to find out which stock is best suited for an investor. Read along.
What is Growth Stock?
Growth Stocks are those stocks that tend to grow at a higher rate than others in the stock market. These stocks have future potential and are known to be part of the companies with a growth mindset. In a growth stock, rather than paying high dividends to the user, the company reinvests the earnings so that they can grow at a fast pace. This result in the share value of the company grows at an exponential rate and tread on a higher note than the normal growth margin of the market.
Growth stocks are much more lucrative for those who want to be in the game in the long run. If anyone is willing to go for the long term equity investment and wants to see their wealth multiply over the years then this one is more suited for their profile. This does put them at the loss of a potential dividend earning which can be achieved with the dividend stock.
What is Dividend Stock?
Dividend stocks, on the other hand, are stocks offered by companies that tend to offer dividends to the shareholder at the end of the year. These stocks are also called as income stocks. Dividend stocks tend to be a great investment option as they provide a source of passive income to the investor. These stocks belong to stable companies and they tend to offer dividends on a regular basis.
Investing in a dividend-paying stock is a great way to add diversity into your portfolio and create a source of passive income. Generally, the share prices of these stocks don’t tend to grow as much as the growth stocks, but that’s not what they are known for.
Comparison between Growth Stocks and Dividend Stocks
Here’s a comparison of growth stocks and dividend stocks based on different traits.
|Comparative Trait||Growth Stock||Dividend Stock|
|Cash flow||Growth stocks are for those who want a long term wealth creation and are not looking for a passive consistent income source.||Dividend stocks tend to provide a consistent source of passive income via the dividend.|
|The time horizon for cash inflow||Here the cash flow will only result when you sell your stock.||Here the cash flow can be witnessed regularly.|
|Type of Company||Growth stock-based companies are those who have a future projection of high growth later on.||Dividend stocks based companies are stable companies that have a steady cash flow and don’t have any impending capital projection going further.|
|Taxation liability under the Income Tax Act, 1961||In case of growth stocks, whenever you sell your stocks you command a taxation liability in the form of long term capital gain.||With dividend stocks, you do command a taxation liability when you sell your stocks just like growth stocks, but the dividend payouts received are tax-free at the hands of the receiver.|
|Growth parameter||Generally, growth stocks underperform in comparison to the dividend stock.||Dividend stocks tend to outperform growth stocks.|
|Compounding effect||With growth stock, the investor can enjoy the benefit of compounding as the excess profits of the company are re-invested back into it giving your investment value a surge in growth.||With a dividend stock, you cannot enjoy the compounding effect as the dividends are paid out and aren’t re-invested back by the company.|
Why Invest in Growth Stocks?
We all have financial goals in mind. These goals tend to vary from a short term like planning a vacation or more to a long term like a retirement fund or buying a dream house. For these goals to materialize we need to find amicable investment solutions that will help us attain that coveted corpus in the long run so that we can fulfil our goals. This is where growth stocks come in.
Growth stocks are a great way to see your investment grow multifold and generate you a large pool of money in the long run. Growth stocks are relatable towards long term investments and are best suited for long term financial goals. It is expected that the company will expand and will prosper in the long run allowing the value of the stock to surge in prices. This will provide the investors with an excellent opportunity to see their initial investment grow multifold and become multi-baggers.
Why Invest in Dividend Stocks?
Dividend stock as we talked about is the one where you’re more likely to see a regular source of cash inflows in the form of a dividend. Dividend stocks are a great source of passive income for any person. It helps to realize the short term goals with these regular passive incomes. It’s not that dividend stocks are merely tied down to dividend payouts only. They also tend to offer capital appreciation, although not in the same vein as that of a growth stock.
Dividend stock is a perfect investment option for those who want a passive source of income all the while also seeking capital appreciation. And since companies offering dividend stock are often those who are financially stable, your investment is likely to be safe. Add to it the benefits like exemption from taxation under the Income Tax Act, 1961 for dividend received; it seems more palatable to opt for it. Dividend stocks are also opted by many so as to diversify their investment portfolio apart from the allure of regular cash inflow.
Both growth stocks and dividend stocks are a great source of wealth creation for any investor. There is ‘no one size fits all’ theory when it comes to an investment as different people have different investment goals and plans. Both of these options tend to present a viable solution for investors who are willing to venture into the stock market. You can opt for the one which suits your needs and goals.