All posts from Mitch
Mitch in $ Financial Freedom Chasers,

You should ALWAYS invest in GROWTH stocks as opposed to DIVIDEND based stocks in your 20's... HERE'S WHY!

There are two very popular categories most of the major stocks out there fall under these days... growth stocks and dividend stocks.

Growth stocks are typically huge companies like Macdonalds, Starbucks, Apple, and Google which appreciates in value over the long run due to their constant growth and reinvesting profits into their own business. Dividend stocks are more favorable to investors, or at least they claim to be, because they pay out a dividend regularly. WIN is a good example of this company, and they try to pay out a dollar a year per stock invested. With prices being around under 10 bucks a stock, it tends to be a good value investment. That means if you buy a thousand WIN stocks, you'll get $1000 for free every year.

When you look at this example, dividend based stocks sounds much more appealing than growth based stocks, but are they really?

The problem with dividend based stocks is that because they are regularly paying out their earnings to stockholders, they don't reinvest as much of it into their own company, so although their stock prices will remain relatively stable, it will be difficult for them to grow. In other words, they are pretty "safe" and well off enough to be able to pay their investors.

Another reason companies will pay dividends to their investors is because their managers can't think of a better growth opportunity for their company. Therefore, they find it better to woo in shareholders by paying them dividends or share buybacks. By giving a dividend worth around 5%, they are saying "we can't find a better place in our company to invest the money that will return greater than 5% so we'll just give it to you and keep you happy".

Here's another important reality to be aware of.... 


Yes you read that correctly. If you think about some of the biggest companies that were around decades ago, not all of them are around today. Just ten years ago, you may even have been tempted to invest in myspace. Would you do that today? Heck no. If you did, you would have lost pretty much all your investment.

Therefore, it's important for companies to constantly be growing and coming up with new innovative things. They cannot do that if they just pay dividends. Some of the biggest companies today got to this point by REINVESTING in themselves, like google and apple. They didn't get big by giving away their earnings to shareholders, unless they are extremely well off. But it all comes down to ROI. If they can get a higher ROI by reinvesting in themselves, it makes no sense to give their earnings to the middle class. Instead, invest that in useful things like CEO's 5 million dollar bonuses so they will continue to stay motivated and make awesome decisions for the company.

Now, this is not to say dividend based companies are bad. They are an important part of a well diversified portfolio. My only suggestion is invest more in growth based companies and slightly less in dividend based companies. Personally I put around 80% of my savings in growth based companies and around 20% in dividend based companies, for the stocks portion of my investment.

Happy investing and share your thoughts in the comments below!