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Stocks To Buy: Dividend Payers Or High-Growth Tech
At The Juice, we love stocks that pay dividends, particularly dividend aristocrats. We also love dividend ETFs. We even include a couple in the ETF portfolio we’re in the process of building.
However, we’re smart enough to know that dividend stock investing isn’t the only way to go. There are times – plenty of times – where you’ll be better off buying a growth stock that doesn’t pay a dividend. Even if you’re a long-term investor.
Too often this discussion feels like a political debate. It goes to extremes. With one side denouncing anything but dividend growth investing. And the other side decrying those who favor that approach. The fact is there’s nuance, which comes down to your timeframe, needs, goals and risk profile.
One key point to make clear about the word growth.
When we refer to growth within the context of dividend growth investing, we can mean one of two things. One, a company that regularly increases (grows) its annual dividend payment. Two, a company still growing revenue and expanding its business. Ideally, we mean both things.
When we refer to growth among non-dividend payers, we’re referring to traditional growth metrics in areas such as (and especially) sales and profit.
Now, let’s consider the debate in a rational way. Which, for better or worse, won’t lead to a definitive answer. However, falling somewhere in the middle, thanks to a dose of rationality, could save you as a long-term investor.
We got to thinking about this after last week’s installment on one of our favorite, non-dividend paying stocks, Uber (UBER):
Yes, Uber loses money (a net loss of more than $9.1 billion in 2022 and $157 million in Q1 of this year). However, that doesn’t matter much. And it’s not only because these losses appear on track to decrease as revenue and other growth metrics continue to rise.
It’s also because, as we noted the other day, the stock market is forward looking. Investors value stocks, especially tech stocks, on the basis of what they’re building. On the things they expect them to do tomorrow, based on the groundwork they’re laying today.
Up 75% YTD, Uber likely won’t pay a dividend anytime soon. If ever. A lot like the company we compared it to – Amazon.com (AMZN).
If you swear off stocks that don’t pay dividends (like some investors do), you’d miss opportunities in Amazon, Uber and one of our other top picks for 2023 – DoorDash (DASH), which is up 73% so far this year.
So let’s run some rough numbers for the sake of illustrating our broad point.
Uber is straightforward. It’s up 75% YTD. So, a $1,000 investment in UBER at the beginning of the year is now worth approximately $1,725. Not bad for a day’s – or about six and a half month’s – work.
Now let’s run some back of the envelope math on a dividend-paying stock you might have been tempted to buy at the beginning of 2023.
Apple (AAPL). Not taking the company’s quarterly dividend into account, AAPL is up about 52% YTD. A $1,000 investment in the stock at the start of the year – without including the dividend payments – would now be worth around $1,523.
Bringing the dividend payments you would have received and, presumably, reinvested into new shares of Apple stock, into the equation. In February, you would have received a $0.23 per share dividend payment, then, in May, a $0.24 per share dividend payment. We ran the numbers and, with these additional purchases of Apple stock, the eight shares you owned at the start of 2023 would have grown to 8.02 shares of AAPL. This would bring your total return from $1,523 to $1527.50.
So, in the short term, you’re better off with Uber.
Let’s run some longer-term numbers.
If Apple continues to increase its dividend payment at the pace it has over the last five years (at about 7.95% annually) and its stock prices grows at about the same pace it has over the last five years (about 32% annually), your 8.02 shares today would turn into 8.11 shares for a value of $6,204 after five years.
Now, let’s look at Uber. This is where it gets tricky and basically unpredictable. Because Uber isn’t as well-established as Apple, making stock price appreciation comparisons using history is, well, just like comparing apples to oranges. Plus, even though it’s possible, we can’t expect Uber to maintain the 75% clip it has been on so far in 2023.
If, for some reason, UBER stock continues to fly at this level – or anything close to it – it is a better investment than Apple.
At the same time, we can likely find dividend stocks, including Apple, that have beaten the returns of non-dividend paying, hyper-growth stocks that haven’t performed quite as well as Uber.
Seems like a ho-hum, even anti-climatic answer to the question. Maybe so. But it reflects reality rather than a polarized debate among different types of investors, stubborn in their respective positions to the detriment of, when it comes down to it, a well-rounded and open-minded view of diversification.
The Bottom Line: In some ways, it’s complicated. In others, not so much.
Ultimately, it goes back to the mantra of diversification. Not only being diversified across asset types and sectors, but among types of stocks.
For most long-term investors, this probably means owning ETFs that track the broad market and key sectors as well as individual stocks.
Some of these individual stocks should be non-dividend paying growth names such as Uber, DoorDash, Amazon or whichever companies you believe in. Others should fit into the category where Apple sits – a dividend growth stock that pays a modest dividend with still impressive stock price appreciation. Then there are the non-tech, dividend growth names. Companies such as Home Depot (HD), JPMorgan Chase (JPM), Chevron (CVX) and McDonald’s (MCD) that pay larger dividends, but produce stock price appreciation that tends to lag behind the Ubers, DoorDashs and Apples of the world.
If you can achieve a healthy mix of dividend growth and revenue growth across your ETFs and individual stocks, you’re already light years ahead of the people foolishly digging in and taking sides.
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