With the market moving to a risk-off environment, the question of whether to buy dividend stocks or growth stocks is top of mind for investors.
The answer lies in understanding your own personal investor profile. While some may argue dividend-paying stocks are a safer place to put your money as multiples condense, many growth stocks have fallen to very attractive prices. Ultimately, it is a question of overall risk tolerance and investment timeframe.
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The importance of understanding business life cycles
Before answering this question for yourself, it’s important to understand that nearly all publicly traded companies fall into one of three business cycles: raising capital, self-funding, and returning capital.
Companies that are in the raising capital stage are highly dependent on new injections of cash for operations, either from secondary offerings (offering additional shares) or taking on new debt. These companies are very early in their life cycles and are high-risk, especially in a rising interest rate environment.
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Once a company becomes consistently profitable, it is in the self-funding stage. This is a sign of a healthy business, and these companies can often continue to grow self-sufficiently for many years. The risk is lower than that of a company in the previous stage.
Finally, mature businesses will often elect to return capital to investors in the form of dividends or stock buy backs. This typically occurs when the business is generating very healthy profits, but has reached the pinnacle of its growth.
The argument for dividend stocks
As explained above, companies that offer dividends are mature, steady businesses. The overall risk profile for these investments is much lower because it’s less likely that businesses in this stage will go bankrupt. As you would expect, the lower risk means lower upside.
Building your portfolio around dividend paying stocks is a great strategy for investors nearing retirement because your portfolio becomes a source of passive income. The inherently lower risk of these stocks also makes sense to older investors as they look to preserve their capital as opposed to significantly grow it.
Some examples of strong dividend-paying businesses include:
- Coca Cola (NYSE: KO) — pays a dividend of 2.96%
- AbbVie (NYSE: ABBV) — pays a dividend of 4.08%
In addition to the dividends, both of these stocks are slightly up in 2022, in a year where the S&…….