Cash is still king but it doesn’t hurt to add some growth to balance
out long-term returns. Take advantage of the higher growth potential in
smaller companies but look for ones with sustainable payouts.
How the Dividend-Growth tradeoff works
After two stock market meltdowns in less than 15 years, investors
have learned that a dividend today is worth much more than the prospect
for higher prices in the future. That constant cash return is worth more
than just money in your pocket, it means that your total return is
cushioned when the market tanks and a quarter of the stock price is
wiped out.
But the allure of big money gains is still strong and even the most
generous dividend payouts can’t compare to growth stories like Oracle
(NYSE: ORCL) and its almost 19,000% return in the ten years to the 2000
peak.
Normally, these high-growth companies are not going to pay a
dividend. They keep all cash flow for reinvestment in the company for
the promise of a higher stock price.
Most dividend-paying stocks,
especially those with yields above 2%, are from large companies in
mature markets. Growth opportunities are fewer and cash flows are more
stable so the company isn’t really sacrificing as much when it pays out a
dividend.
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