The Advantage of Having Both Kinds Of Stocks In Your Portfolio

The theory behind this method is that all corporate profits, whether they are paid as dividends to investors or reinvested into growing the company, are of benefit to the investors themselves who are the shareholders of the company.

There are generally two main kinds of investment strategies: Growth investment strategies and Value investment strategies. Investors typically choose a strategy that works best for them and then find stocks that would give them their preferred option: Growth or Value.

Growth investing involves purchasing stocks whose companies are geared towards capital appreciation and exhibiting high growth. While these companies would not pay so much in dividends because of their focus on growing (often leading them to reinvest profits), they bring exponential returns to the investor’s funds.

An investor can determine growth stocks based on projections carried out, trend analysis, and more, all of which are still governed by the market conditions. The risks are that growth stocks are more volatile than dividend or value stocks because a bird in hand is worth more than two in the bush.

In other words, there is a risk of possible drop in value as it is still influenced by market sentiments and so on.

Value stocks also have a strong potential. They are known to trade at a lower price relative to their dividends, earnings, etc. Value investing involves choosing stocks that seem to be trading at lower than their book value.

For clarity, we would focus on value stocks that focus on dividend payments because most value stocks pay dividends. Dividend-focused companies are less volatile in nature.

Many of these stocks aren’t growing as fast as growth stocks but it isn’t because they aren’t doing well. Rather, it is because the companies are mature ones that have stayed in the market for many decades and have a certain steady market share they own.

They are known to have stable cash flows and can offer good dividend yields.

While many investors choose to have a kind of stock also because of their investment goals, the long-term investor having a holistic view of his investment horizon, should have both in his or her portfolio.

Of course, the dividend focused investor would not be able to extract the gains of his or her investments if this sandwich strategy is used. Investing in both kinds of stock is a game that only the investors of the future would play.

The theory behind this method is that all corporate profits, whether they are paid as dividends to investors or reinvested into growing the company, are of benefit to the investors themselves who are the shareholders of the company.

Also, both have their benefits but investing in both creates a balance that has the potential of getting higher returns with less risk. This strategy allows investors to gain from the changing cycles which may either favour value (dividend) or growth stocks.

As long as the dividends earned are invested into your portfolio, you would be winning from two different angles.

Written by Lawretta Egba.