Dividend Investing vs Growth Investing

JC Project Freedom Dividend Investing vs Growth Investing
Image by Jason Goh from Pixabay

I was watching an interview with Dividend Magic by Mr-Stingy. You can watch the video below. I am not familiar with the drama that happened with Dividend Magic’s Leigh. He believed in Dividend Income Investing while there was someone who strongly advocates Growth Investing to him, pinpoint that Growth Investing is more superior to Dividend Investing. I am at the crossroad of trying to find my own investment methodology. Am I swayed by the crazy returns of Growth Stocks in 2020? Definitely, yes!

Source: Youtube – Dividend Magic’s Reveal Session with Mr. Stingy

I was watching an interview with Cathie Wood, Chief Investment of ARK Invest (watch below), she explained the different five platforms of disruptive innovation. I agree that innovation is achieving very rapid growth and technology is disrupting every industry. Square and Paypal are going to allow people to transport their banks on their cell phones. Digital wallets are disrupting traditional banks. I was reading a fund report by Hayden Fund’s Fred Liu. In Australia, there is Afterpay which is growing very rapidly in the USA, disrupting traditional credit cards. The research shows the younger generation is embarrassed to use credit cards and prefer to make payments using debit cards and cash. This is mind blown!

source: Youtube ARK: The five platforms of disruptive innovation

What is Growth Investing?

According to Investopedia, Growth Investing is an investment style that focuses on growing the investor’s capital. They invest in growth stocks which are young or smaller companies that have earnings growing at more than above-average rate compared to their industry. Investing in stocks in emerging companies can provide massive returns once they are proven to be successful. Growth investors increase their wealth through capital appreciation. As the companies are growing rapidly at their infant stage during launch and growth stage as seen as below image, there will not issue any dividend.

Source: https://corporatefinanceinstitute.com/resources/knowledge/finance/business-life-cycle/

What is Dividend Investing?

Dividend Investing is an investment strategy which purchase stocks that pay dividend which provides a regular dividend income from investment portfolio. Investment return comes from capital appreciation and dividend return.

Dividend investing needs to look into acquiring companies with strong economic moat which creates strong free cash flow that allow them to continuously pay dividend. Personally, I am shifting from pure Dividend Income Investing to Dividend Growth Investing. The criteria needs to be more stringent in order to ensure that the dividend income does not suffer and should be growing on a year on year basis.

Even with low dividend payout ratio does not guarantee that dividend is safe, during COVID-19 days, there are a lot of companies which cut their dividend because of lower revenue and free cash flow. Wait, what do you mean Dividend Growth Investing?

I used to chase high yield strategy which focuses on slow growing companies which are often in a net-net or cigarette butt state, fully flushed with cash but they are not growing much or even stop growing at all. These companies can pay large dividend payments and provide immediate income. These are usually >5% dividend yield companies with very low debt and cash rich.

Dividend Growth Investing will shift into buying companies that pay lower dividend but are growing year on year. With dividend compounded, this will help to grow the dividend income over a long run. For example, Starbucks during its growing phase are growing their dividend rapidly year on year. This will be the type of companies which I am going to focus on.

Watch below video on some interesting discussion on ARK Invest.

Personal Goal

This FY2020 Dividend Income will be SGD 46,251 compared to the forecast dividend of SGD 74,000. This is a sharp drop as companies are cutting dividends. Our target dividend income is SGD 80,000 per annum. That is the magic financial freedom number that I am working hard towards. Look at the below figure, this is the composition that I am trying to shift the funds to. I am trying to shift some of the rubbish companies that I have towards ETF and revamp the portfolio with Dividend Growth Stocks. Dividend income will be pumped to buy more ETFs. I am going to increase Funding Societies portfolio to SGD 20,000 (current FS portfolio is at SGD 5,000) and cap it to 1% of net worth, rebalance profit to buy cryptocurrencies.

Figure: Target JC Fund portfolio composition

Be the first to comment

Leave a Reply

Your email address will not be published.