I’m a dividend investor. So, do I invest for growth?
It seems that if I choose to invest for dividend income, I don’t invest for growth. The perception is that dividend investing is for cash flow while growth investing is for capital gains. Hence, in this write-up, I’ll share my views on this and would elaborate what exactly is growth investing and how good dividend investors are in fact really good in growing their capital over time.
1. What is Growth Investing?
Here is a question:
‘What does it mean when a person says that he is investing for growth?’
Does it mean that he is a growth investor? For me, it really depends as I believe there is a distinction between a genuine growth investor and the others who, in fact, are traders, speculators, and gamblers (TSG). As investors, I think it helps a great deal if we know how to separate the differences between an investor and TSGs who claim to be investors.
The key to separating them is to know the real definition of growth investing.
For a start, most tend to associate growth investors as people who aim to enjoy capital gains from their stock investments. That is okay.
The deeper question is, ‘What are the driving factors for these capital gains?’
What are the bases for stocks to appreciate in stock prices?
Genuine growth investors shall offer different insights to the question above, as compared to TSGs. This is because investors believe that the basis for a stock to appreciate in stock price over time are reliant upon its fundamental qualities. In general, these qualities include a rise in customers, a rise in products & services that add value, a rise in sales, a rise in profits, a rise in cash flow, a rise in assets and so on and so forth, which in turn, would make the business more valuable.
The growth in stock price is not based on some ‘lofty’ ideas. It has to be backed by logic and common sense.
2. Growth Investors are Cash Flow Investors
This is contrary to conventional belief.
Growth investing is a subset of cash flow investing. Genuine growth investors in the stock market place great emphasis on the cash flow management of a stock before investing. This is similar to dividend investors. Hence, let me reiterate:
Growth and Dividend Investors Read Cash Flow Statements.
But, the motivation for reading them would be slightly different. For instance, a dividend investor likes to know if the company (stock) could generate operating cash flows consistently so that he will earn dividend income consistently. But, a growth investor is also looking for a company that brings in operating cash flow consistently so that the company can reinvest the cash flow back to its business via R&D activities, market expansion, business acquisitions … etc in order to get more sales, profits, cash flows … etc and thus, enhancing the value of its stock.
To simply put, their differences are:
Growth Investors want Cash Flow to be Reinvested for Growth.
Dividend Investors want Cash Flow to be Paid to Them in Dividends.
It is a matter of preference and priority.
3. Most Dividend Investors are Growth Investors Too.
Yup, myself included.
This is because I don’t just invest into stocks for their current dividends but also for their future dividends. I like to collect growing dividend income over time so I would invest in companies that are ambitious to pursue growth in the future. I would say many of such companies tend to strike a balance between rewarding their existing shareholders with dividends while enhancing the company’s value with growth initiatives from their operating cash flows.
This explains why I can practise both dividend and growth investing at the same time.
4. The Standard Checklist
I would use the same standard checklist to assess a stock deal in pursuit of both dividends and growth.
1. Business Model: Has it evolved to be better over the last 10 years?
2. Financial Strength: Has it been increasingly profitable for the last 10 years?
3. Cash Flow 1: Did it consistently bring in operating or free cash flows?
4. Cash Flow 2: How much cash does it have in the bank?
5. Initiatives: Does it have any growth initiatives that it is pursuing?
A stock should pass these criterias before being classified as a growth stock.
Although I view myself as a dividend investor, I do invest for growth as my stock portfolio is also filled with stocks that are driven to pursue growth in the future. I do not separate the two as it is not necessary to do so.
Here, I’ll end with some pointers about growth investing:
1. Make a distinction between Growth Investors and TSGs.
2. Growth Investors are Cash Flow Oriented Investors.
3. Most Dividend Investors are essentially Growth Investors.
Thanks for reading this. I hope you find it useful.
If you have any questions / feedback, please post them to firstname.lastname@example.org.
Stay tuned for my latest next week.