What's the difference between a high yield dividend stock vs a growth stock?

Question

I'm new to investing and still learning my way. What's the difference between a stock that stays relatively stable during good and bad times and returns a high dividend vs a stock that is supposed to be a growth stock over the long term?

I'm looking at Pfizer vs GlaxoSmithKline as an example Pfizer for long term growth vs Glaxo for long term dividend yield. If I buy into any of these stocks, I would hold them for a long time. I just want to know the basic difference between these two types of stocks. Plus with the high dividend I would obviously reinvest.

Thanks

Answer 1

I think Fidelity has a very nice introduction to Growth vs Value investing that may give you the background you need. People love to put stocks in categories however the distinction is more of a range and can change over time. JB King makes a good point that for most people the two stocks you mentioned would both be considered value right now as they are both stable companies with a significant dividend. You are correct though Pfizer might be considered "more growth."

A more drastic example would be the difference between Target and Amazon. Both are retail companies that sell a wide variety of products. Target is a value company: a established company with stable revenues that uses its income to give a fairly stable dividend. Amazon is a growth company: that is reinvesting its revenues back into the corporation to grow itself as fast as possible.

The price of the Amazon stock reflects what people think will be future growth (future income) for the company. Whereas Target's price appears to be based on the idea that future income will be similar to current income. You can see why growth companies like Amazon might be more risky as that growth you paid a high price for may not be realized, but the payout may be much higher as well.

Answer 2

The two are not incompatible. This is particularly true of Glaxo and Pfizer, two drug companies operating in roughly the same markets with similar products.

Many "good" companies offer a combination of decent yields and growth. Glaxo and Pfizer are both among them.

There is often (not always), a trade-off between high yield and high growth. All other things being equal, a company that pays out a larger percentage of its profits as dividends will exhibit lower growth.

But a company may have a high yield because of a depressed price due to short term problems. When those problems are fixed, the company and stock grows again, giving you the best (or at least the better) of both worlds.

Answer 3

The general difference between high dividend paying stocks and growth stocks is as follows:

1) A high dividend paying stock/company is a company that has reached its maximum growth potential in a market and its real growth (that is after adjustment of inflation) is same (more or less) as the growth of the economy. These companies typically generate a lot of cash (Cash Cow) and has nowhere to really invest the entire thing, so they pay high dividends. Typically Fast Moving Consumer Goods (FMCG) ,Power/Utility companies, Textile (in some countries) come into this category. If you invest in these stocks, expect less growth but more dividend; these companies generally come under 'defensive sector' of the market i.e. whose prices do not fall drastically during down turn in a market.

2) Growth stocks on the other hand are the stocks that are operating in a market that is witnessing rapid growth, for example, technology, aerospace etc. These companies have high growth potential but not much accumulated income as the profit is re-invested to support the growth of the company, so no dividend (you will be typically never get any/much dividend from these companies). These companies usually (for some years) grow (or at least has potential to grow) more than the economy and provide real return. Usually these companies are very sensitive to results (good or bad) and their prices are quite volatile.

As for your investment strategy, I cannot comment on that as investment is a very subjective matter.

Hope this helps

Answer 4

There can be the question of what objective do you have for buying the stock. If you want an income stream, then high yield stocks may be a way to get dividends without having additional transactions to sell shares while others may want capital appreciation and are willing to go without dividends to get this.

You do realize that both Pfizer and GlaxoSmithKline are companies that the total stock value is over $100 billion yes? Thus, neither is what I'd see as a growth stock as these are giant companies that would require rather large sales to drive earnings growth though it may be interesting to see what kind of growth is expected for these companies. In looking at current dividends, one is paying 3% and the other 5% so I'm not sure either would be what I'd see as high yield. REITs would be more likely to have high dividends given their structure if you want something to research a bit more.

Answer 5

If you are looking to re-invest it in the same company, there is really no difference. Please be aware that when a company announces dividend, you are not the only person receiving the dividend. The millions of share holders receive the same amount that you did as dividend, and of course, that money is not falling from the sky. The company pays it from their profits. So the day a dividend is announced, it is adjusted in the price of the share. The only reason why you look for dividend in a company is when you need liquidity. If a company does not pay you dividend, it means that they are usually using the profits to re-invest it in the business which you are anyway going to do with the dividend that you receive. (Unless its some shady company which is only established on paper. Then they might use it to feed their dog:p).

To make it simpler lets assume you have Rs.500 and you want to start a company which requires Rs 1000 in capital : -

1.) You issue 5 shares worth Rs 100 each to the public and take Rs 100 for each share. Now you have Rs 1000 to start your company.

2.) You make a profit of Rs 200.

3.) Since you own majority of the shares you get to make the call whether to pay Rs.200 in dividend, or re-invest it in the business.

Case 1:-

You had issued 10 shares and your profit is Rs 200. You pay Rs. 20 each to every share holder. Since you owned 5 shares, you get 5*20 that is Rs.100 and you distribute the remaining to your 5 shareholders and expect to make the same or higher profit next year.

Your share price remains at Rs.100 and you have your profits in cash.

Case 2:-

You think that this business is awesome and you should put more money into it to make more. You decide not to pay any dividend and invest the entire profit into the business. That way your shareholders do not receive anything from you but they get to share profit in the amazing business that you are doing.

In this case your share price is Rs. 120 ((1000+200)/10) and all your profits are re-invested in the business.

Now put yourself in the shareholders shoes and see which case suits you more. That is the company you should invest in.

Please note: - It is very important to understand the business model of the company before you buy anything!

Cheers,