Understanding the differences between dividend stocks and growth stocks is critical for investors. Dividend stocks pay out a percentage of a company’s profit to each shareholder at a regular interval. Typically, these businesses are well-established with large market shares and fewer opportunities for significant growth. On the other hand, growth companies are often newer and are trying to gain a more significant market share. These companies have plenty of growth opportunities by reinvesting all of their profits to help accelerate their expansion even further.
Dividend stocks are usually less volatile than growth stocks because they are more established with a larger market share. While the volatility of growth stocks creates risk, it also allows an increase in returns. Balancing the risk versus reward with growth stocks is essential to determine if it’s worth the investment or if you should focus more on finding the best dividend stocks. It’s also important to remember that dividend stocks will allow you to gain some of your returns with cash payouts, while you won’t realize these returns with growth stocks until you sell them.
Current interest rates can significantly impact the value of growth stocks. For example, the estimated amount of future cash for a stock will eventually drop if investors feel that it’s less profitable or doesn’t have enough room to grow due to increased interest rates. A lowered expectation for a company’s growth will make it less desirable to own this stock, and it may even be viewed as too risky if you compare it to more established companies. Of course, some sectors benefit from an increase in interest rates, such as those in the financial industry, as these are often the best growth stocks to buy now due to their ability to charge more for lending.
Dividend stocks are more greatly affected by interest rates compared to growth stocks. For example, most people tend to invest in dividend stocks for the dividends’ additional income stream, as Treasury bonds become a more attractive substitute if the fed interest rates rise. This happens because the return on bonds also increases, as bonds are considered a safer investment than dividend stocks. In other words, investors can reduce their risk while still receiving the same return by selling their dividend stocks and buying bonds due to an increase in current interest rates.
Weighing the differences between dividend stocks and growth stocks is critical for investors. Choosing to go with growth stocks is often the best choice, as you will need a significant amount of money invested in dividend stocks if you plan to make enough money from the dividend payments. For example, the average dividend yield is only around 2.2%, which means you will only make $2,200 each year from your dividend payments if you have $100k invested in dividend stocks. This isn’t enough passive income to make a living.
On the other hand, investing in growth stocks is an excellent option for young investors due to the ability to take on more risk. A young person can easily make up for any losses before starting to think about retirement. Investing heavily in different growth stocks while you are young allows you to significantly increase your investments before you begin to transition to safer investments as you near retirement. Just be sure to focus on creating a well-diversified portfolio that includes less risky investments, such as bonds that will help to balance out your portfolio.
The Fed interest rates will continue to impact the stock market significantly. An increase in the current interest rates will also affect the psychology of investors, as businesses and consumers will often reduce their spending due to these changes. Less spending causes the earnings of stocks to fall, which can impact the entire stock market. However, the opposite happens once the Federal Reserve Bank announces a cut in interest rates, as this causes stocks to rise due to the anticipation of an increase in spending for businesses and consumers. Bottom Line with the Fed hiking interest rates, expect volatility in the coming days and quarters ahead. Investors need to
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Posted: April 27, 2022
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