I am a young investor (24 yo) with a stable income and would like to know which long-term investment plan would be more appropriate for people around my age and why:
Growth Stocks or Dividend Growth Stocks making use of a dividend reinvestment plan (DRIP)
The key is to look at total return, that is dividend yields plus capital growth.
Some stocks have yields of 5%-7%, and no growth. In that case, you get the dividends, and not a whole lot more. These are called dividend stocks.
Other stocks pay no dividends. But if they can grow at 15%-20% a year or more, you're fine.These are called growth stocks.
The safest way is to get a "balanced" combination of dividends and growth, say a yield of 3% growing at 8%-10% a year, for a total return of 11%-13%. meaning that you get the best of both worlds.These are called dividend growth stocks.
First, what Daniel Carson said.
Second, if you're getting started, just make sure you are well diversified. Lots of growth stocks turn into dividend stocks over time-- Microsoft and Apple are the classic examples in this era. Someday, Google will pay a dividend too.
If you're investing for the long haul, diversify and watch your taxes, and you'll make out better than nearly everyone else.
In financial theory, there is no reason for a difference in investor return to exist between dividend paying and non-dividend paying stocks, except for tax consequences.
This is because in theory, a company can either pay dividends to investors [who can reinvest the funds themselves], or reinvest its capital and earn the same return on that reinvestment [and the shareholder still has the choice to sell a fraction of their holdings, if they prefer to have cash]. That theory may not match reality, because often companies pay or don't pay dividends based on their stage of life.
For example, early-stage mining companies often have no free cashflow to pay dividends [they are capital intensive until the mines are operational]. On the other side, longstanding companies may have no projects left that would be a good fit for further investment, and so they pay out dividends instead, effectively allowing the shareholder to decide where to reinvest the money.
Therefore, saying "dividend paying"/"growth stock" can be a proxy for talking about the stage of life + risk and return of a company. Saying dividend paying implies "long-standing blue chip company with relatively low capital requirements and a stable business". Likewise "growth stocks" [/ non-dividend paying] implies "new startup company that still needs capital and thus is somewhat unproven, with a chance for good return to match the higher risk".
So in theory, dividend payment policy makes no difference. In practice, it makes a difference for two reasons:
(1) You will most likely be taxed differently on selling stock vs receiving dividends [Which one is better for you is a specific question relying on your jurisdiction, your current income, and things like what type of stock / how long you hold it]. For example in Canada, if you earn ~ < $40k, your dividends are very likely to have a preferential tax treatment to selling shares for capital gains [but your province and specific other numbers would influence this]. In the United States, I believe capital gains are usually preferential as long as you hold the shares for a long time [but I am not 100% on this without looking it up].
(2) Dividend policy implies differences in the stage of life / risk level of a stock. This implication is not guaranteed, so be sure you are using other considerations to determine whether this is the case.
Therefore which dividend policy suits you better depends on your tax position and your risk tolerance.
A lot of people use dividend stocks as a regular income, which is why dividend stocks are often associated with retirement. If your goal is growth and you're reinvesting capital gains and dividends then investing growth stocks or dividend stocks should have the same effect. The only difference would be if you are manually reinvesting dividends, which could incur extra trading fees.
