There are many different investment styles and strategies for an investor to choose from. However, there are only two that have created fierce debates, which have been going on for decades. Which is better, growth or value stock? These two investment styles certainly are ideal for specific investors. But people try to determine which style is ultimately better for their portfolios in the long run. When it comes to dividends, one of these styles is without a doubt better than the other. Years of academic research and stock analysis show that an investor should be considering value when investing in dividends.
For any investor who is looking for income, the investor should steer their portfolio in the direction of value dividend stocks, as this is key to getting better returns. Basically, a growth stock is defined as a company that has the potential of “growing” in the predictable future. Typically, a growth stock will experience very faster than average increase in cash flow, earnings or revenues than sector or broader market averages. In addition, an investor will be willing to pay a premium price and hence higher price to earnings ratio. On the other hand, a value stock is one that is trading for a price that is below its fundamental worth.
This can essentially be on a combination of various factors such as assets on hand, book value or debt to equity. The market can undervalue the stock due to various reasons, but the general factor is that the stock is worth more than it is currently being traded for. From these two definitions, it can be clear to see why value will always beat growth as far as dividend investing is concerned. This is because most growth stocks are sometimes small- and mid-caps, but value stocks are large-caps owned by already established companies. Growth stocks are common with smaller firms, which tend to devote their revenues towards acquisitions and expansion.