John Jagerson

Dividends or Growth -- Do You Have To Choose?

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Prior to the 1980s, it was common to assume that a stock's value was derived from the discounted total of estimated future dividend payments. However, in the 1980s and 1990s, alternative theories arose and there are still significant questions about whether changes in the estimates of future dividend payments can fully explain the volatility of a stock's price.

There are still a lot of questions about what really drives prices.

The change in attitudes about the value of dividends during this period has attached a stigma to investors looking for dividend-paying stocks. The counter argument often centers on how much better it would be to look for "growth" stocks over those paying a dividend.

This argument is not actually valid. In fact, some diversified indexes of dividend-paying stocks, such as the Dow Jones Select Dividend Index, would have outperformed the S&P 500 (SPX) and the small-cap Russell 2000 (RUT) by almost 100% during the last 10 years. Even compared to other growth indexes, dividend-paying stocks outperformed based on lower volatility to returns.

Perhaps deciding between a dividend-paying portfolio of stocks and a growth-oriented portfolio is not a decision that has to be made. It seems entirely reasonable that income and growth can and do exist side by side.

In other words, following the wisdom of those financiers that came before the boom in quantitative analysis in the '80s may pay real dividends!

There are multiple ways to approach developing a portfolio like this.