# Dividends v.s growth stocks?



## Steve19 (Jun 29, 2009)

If individuals have 25+ years before retirement and don't need/want the income until retirement, why not seek out growth stocks which 'may' provide a higher return over the long haul? Yes, dividends provide a slow and constant return (say 4% per year), but how are they better than growth stocks in the long run? 

I could understand if you grew your money with growth stocks and then place them in dividend stocks/funds to have a constant return, but the other way around seems like it would take a longer time. 

Thoughts?

Thanks.


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## HaroldCrump (Jun 10, 2009)

"Growth" stocks usually refer to companies and industries that have high (or exponential) growth potential, such as IT, mining, exploration, some revolutionary new technology, etc.
Thus, they are highly volatile.
You may bet the wrong way and lose a lot of money.
Over the years, there have been so many companies that seemed to promise the sky but fizzled out after a few years.
Those that made it through, are no longer "growth" stocks; instead, they are now more established, steady companies and no longer provide double digit growth year over year.

Growth stocks do have a place in a portfolio, but the % would depend on the risk profile of the investor.
Hand-picking "growth" stocks is not easy and even if you are right 50% of time, you may only break even.
OTOH, you could be wrong majority of the time and after decades of "growth" investing, you may not have much to show for your time and efforts.


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## John_Michaels (Dec 14, 2009)

I agree with HaroldCrump. The problem is find the growth (risky) stocks versus the - say - blue chip stocks. It's hard to tell the difference between luck & skill. One bad year of losses and it'll take you that 25+ years to make up for it.

My current thought process is that;
1. For income in retirement, I need to sell all those growth stocks to convert to fixed income/dividendds= massive capitial gains that I need to pay...oops, there goes my assets (ya ya, phased approach) to the gov't.

2. Dividends are taxed much less at my target retirement income. Picking <$64K income in Ontario, it's 7.44% versus 16.49% tax. Haven't done the xls goal seek but I bet this means I can retire earlier since it's after-tax that matters.

Assuming that you're doing fantastic by beating the TSE index, compare - say - RBC to the TSX index for as far back (yahoo only goes to 2000 but S&P500 goes back to 1995) as you can....RBC signicantly beats it, you've reinvested the dividends so you have more capital gains, AND you have dividend income in retirement that is taxed less. huh. 

Past returns don't equal future returns but less risk for loss than some small cap oil & gas co.

I'm not advocating a one-sector or one-stock investing strategy and I do recognize this is not an RRSP strategy but a after-tax investing strategy.

Always looking to learn...I hope some can point out the flaws in my logic?


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## Oldroe (Sep 18, 2009)

My basic strategy is new money into growth take profits and move into div. I bought Onex at $15.65 and sold at $23.10. Suncro I'm looking for $43 to sell. 

I just use patience to buy and usually take profits to early, buy on fear and sell on happy I'm not buying anything now.


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## HaroldCrump (Jun 10, 2009)

If you consider the Dow Jones Canada Growth Index, you'll see that this so-called "growth" sector 10 year returns are -2.40%.
The iShares ETF that mirrors this (XCG) has returned 1.16% since its begining 4 years ago.
This index has huge volatility, sometimes returning more than 20% in a year.
So either you time your entry and exit with precision to capture these swings or you try hand-picking growth stocks to beat this index.
Either way, it seems like a lot of work unless investing is your FT job.
-- edited to clarify that this is not directed at the previous poster Oldroe, but a general comment/observation --


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## furgy (Apr 20, 2009)

Oldroe said:


> My basic strategy is new money into growth take profits and move into div. I bought Onex at $15.65 and sold at $23.10. Suncro I'm looking for $43 to sell.
> 
> I just use patience to buy and usually take profits to early, buy on fear and sell on happy I'm not buying anything now.


I do allmost exactly the same , spend a set ammount on speculative stocks and sell when I can make 10-20% , whatever I figure is safe , I try not to get too greedy , doesn't matter how high I "think" it might go.

I take any profits and put them into REIT's with the highest payouts , right now my REIT portfolio is generating returns of about 16% , considering my entry prices.

Over the last few years it has paid off well for me , even with this last market meltdown , my distributions made up for any losses in share price.


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## HaroldCrump (Jun 10, 2009)

furgy said:


> I take any profits and put them into REIT's with the highest payouts , right now my REIT portfolio is generating returns of about 16% , considering my entry prices.


Do you mind sharing your REIT holdings? I have been thinking about the XRE ETF which is paying out about 7%.
Which specific REIT is paying 16%?

Thanks


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## Oldroe (Sep 18, 2009)

Those 10 year #'s don't mean that much to me.

It's what I've done in 10-20 years. You can call it market timing, I stick to larger stocks most of the time. I do buy value stocks sometimes. My current value stock has Goodwood Fund owning a big piece another has First Leaside ownership.


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## leslie (May 25, 2009)

I disagree with most all the above. I don't care whether my returns come from dividends or capital gains. I don't limit my investments by the promise of one over the other. In total there is no tax difference to me. My personal cash needs are perfectly met by periodically withdrawing cash from stock sales - I don't need income.

A lot depends on a few personal things.
* Do you agree with all the back-testing of historical returns? I have a health disrespect for statistics. And academia has always poo-pood back testing.
* Do you like investing enough to pay attention on a more regular basis? I think the process is fun, so I don't mind the attention that MUST be paid for non-dividend stocks.
* Do you have the skills necessary to pick stocks? If you are not comfortable reading and understanding financial statements then you should stick to blue-chip dividend stocks (or better yet don't pick stocks at all: use ETFs). Do you know how to form your own opinion of the company's future growth? Can you see where its risk lie?
* Can you mentally withstand price volatility? Dividend stocks will be less volatile. But I enjoy the game and can tolerate a lot of volatility.


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## John_Michaels (Dec 14, 2009)

leslie - I agree with your comments...it's the core argument of low MER ETRs versus owning the stocks. However, assuming it's still on topic, I hope we can dive into your statement of "..there is no tax difference to me" between dividends & capital gains (stock sales).

Taking an extreme, assuming your retirement income is <$40K, with dividends you pay no tax, with capital gains it's 12%. Over a retirement period, that's pretty significant. Obviously as we move up the scale, the tax differences are less and the argument less compelling - unsure if this is your case? Or are you coming from the fact that your income is from RRSP so it's really Income (not Capital Gains or Dividends) anyway?

I know there are downsides with dividends but it's after-tax that matters isn't it?


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## cannon_fodder (Apr 3, 2009)

furgy said:


> I do allmost exactly the same , spend a set ammount on speculative stocks and sell when I can make 10-20% , whatever I figure is safe , I try not to get too greedy , doesn't matter how high I "think" it might go.
> 
> I take any profits and put them into REIT's with the highest payouts , right now my REIT portfolio is generating returns of about 16% , considering my entry prices.
> 
> Over the last few years it has paid off well for me , even with this last market meltdown , my distributions made up for any losses in share price.


If you were holding these investments in a non-registered account, what about doing the opposite? Invest in dividend payers and then take the dividends and buy growth stocks.


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## Oldroe (Sep 18, 2009)

I don't see any problem with moving money from div. stocks to growth. Also don't see any difference in the skill set required, or the amount of time required to accomplice it.


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## Steve19 (Jun 29, 2009)

John_Michaels said:


> I know there are downsides with dividends but it's after-tax that matters isn't it?


Hi John,

This is exactly what I'd like to know. Has anyone done the math? 

I can see the benefit of continuously buying and holding dividend stocks without selling them, which at retirement would be great because you can have a steady income; however, I don't think over 30+years most individuals will keep ALL dividend stocks, rather I'm sure some will sell certain stocks and still incur capital gain taxes.

So, as John already ask, where is the break even point between dividends and growth stocks and after tax implications? 

Thanks.


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## leslie (May 25, 2009)

*Tax on selling :* The advisor's arguments about "the tax on selling to purchase a better stock will destroy returns" is bogus given most assumptions. See the argument.
*
After-tax returns*: There are universal facts about the marginal rates from different types of income . See the current Cdn rates by type. The way to calculate after-tax returns is at the bottom. The tradeoff depends on your personal tax bracket so you must do the work yourself. But that must always be applied to people's personal situation.

E.g. most people's investments are sitting in RRSPs. So taxes are immaterial. 
E.g. better off people have enough portfolio income outside pensions that the Alternate Minimum Tax overrides the basic calculations.
E.g. People like me with a mix of income types find they compliment each other so that the taxes I pay (on average over time) are only between one half a percent and one percent of my taxable portfolio. I am not going to let the tax-tail wag the investment dog for that small amount. One good investment would make up that cost. Heck one hour of trading will make up that difference.


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## leslie (May 25, 2009)

Some examples of the income you can earn BEFORE any tax is paid (normal or Minimum Tax):

$21,000 all capital gains
$50,000 all dividends
$50,000 with 20,000 from Div and 30,000 from CapGains
$50,000 with 30,000 from Div and 20,000 from CapGains
$48,000 with 15,000 from Div and 33,000 from CapGains

The vast majority of Canadians are not earning those kinds of incomes in taxable accounts.


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## John_Michaels (Dec 14, 2009)

leslie - thank-you, great response, a lot of food for thought.

Steve19 - my bad, I've taken implemented an investment strategy without doing the math, puts me in with 99% of the population I guess. I've searched 'gummy' but can't find the magic spreadsheet. I need to create the xls that takes into account; time period, annual taxes paid on annual dividends versus the captial gains upon retirement, tax brackets, effect of the gross-up etc.. it's a hobby.

but, that being said, the primary determinant on a good retirement income (other than stay healthy of course) is...spend less than you make  all else is gravy.


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## furgy (Apr 20, 2009)

HaroldCrump said:


> Do you mind sharing your REIT holdings? I have been thinking about the XRE ETF which is paying out about 7%.
> Which specific REIT is paying 16%?
> 
> Thanks


There is no specific REIT on which I base my returns , it is my whole REIT portfolio averaged.

Some pay more than others , for instance , CRH.UN which I bought back in April , is paying me 21% , considering my entry price then , which is what I base my real returns on , if you were to buy it at todays price , you would be getting about half that.

RMM.UN is another good example , if you had loaded up in April as I did , your return would be almost 35% , if you buy today , you would still be getting about 15%.

Some others like TR.UN have slashed their distributions in less than half , they are still paying about 16% based on todays price , but considering my average entry price is about twice todays price , it brings my return down to about 8% , binging my overall average down.

(I would buy more TR.UN at these prices but it is a hotel REIT and will not qualify for REIT status come 2001 , so may be too risky.)

These are just some of my REIT holdings , some may consider them too risky , not to mention my ignoring the rule of diversification(which I don't believe in) , myself , I am happy with the returns and am willing to take the risk.


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## AdamW (Apr 22, 2009)

*Dividend Growth Investing*

Steve19 ... most people who follow dividend growth investing feel that you can get the best of both worls, growth and income. 

Many studies show that companies that pay, *and regularly increase* their dividends tend to out perform their peers who either just pay dividends or those who don't. There are a few studies that also link the rate at which the dividends grow to the long term growth rate of the underlying share price.

At the end of the day research different investing styles and pick the one you believe in most, this way you will stick to it as that is the true key to investment success.

If you have 25+ years to retirement I wouldn't be overly concerned with taxation issues at this point in time, you can keep them in the back of your head but concentrate on building your portfolio properly ... if you have to pay a little more tax to have it the way you want so be it!


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## ssimps (Dec 8, 2009)

AdamW said:


> Steve19 ... most people who follow dividend growth investing feel that you can get the best of both worlds, growth and income.


This is what I try to do; quality dividend stuff for the long haul; growth when opportunity knocks. 

The funny thing about the first 1/2 of this year has been that you were able to buy high yield stocks that have turned out to also have had incredible growth since; so what to do, sell or keep? I don't know. 

Say you have a stock or ETF that is paying 7-9% yield based on purchase price, and the stock is up 30 + % now; what to do, keep those yields locked in for the years ahead (assuming the div does not drop), or take the equiv, of 3 - 4 years yields by selling now? Again, I don't know. So far my actions have been to keep them, but I'm not sure this is the right thing or not.


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## OhGreatGuru (May 24, 2009)

There are several sources that recommend a mix of value (into which dividend paying stocks usually fall) and growth stocks as the optimal long-term asset allocation. This is the underlying philosophy of the O'Shaughnessey Funds for example. 

Gummy Stuff http://www.financialwebring.org/gummystuff/ has 2 articles on long-term historical performance of Large-cap Value/Small Cap value/Large Cap Growth/ Small Cap Growth. The author is a retired mathematician who takes a statistical approach to analyzinbg common investing questions. He can be hard to follow at times, but on this particular question he does conclude that a blend is the wisest long-term strategy.


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## AdamW (Apr 22, 2009)

ssimps said:


> Say you have a stock or ETF that is paying 7-9% yield based on purchase price, and the stock is up 30 + % now; what to do, keep those yields locked in for the years ahead (assuming the div does not drop), or take the equiv, of 3 - 4 years yields by selling now? Again, I don't know. So far my actions have been to keep them, but I'm not sure this is the right thing or not.


It really all depends on your needs and the individual companies. If you think that the prospects 5 + years out are still good and the companies have the ability to grow their dividends too I would be inclined to hold on to those positions.

But if you think the companies are fully / fairly valued right now and hold some positions that aren't it might be time to look at taking some profits and shifting things around in the portfolio.

But I would never sell a stock just because it went up ... only if I felt there was a better place for the money for the next 3-5 years. And even then I wouldn't really completely sell out, just trim a little fat off the top.


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## ssimps (Dec 8, 2009)

AdamW said:


> But I would never sell a stock just because it went up ... only if I felt there was a better place for the money for the next 3-5 years. And even then I wouldn't really completely sell out, just trim a little fat off the top.


I agree, and this is why I have not sold this stuff yet. 

Given my pre-crash stock picking luck (well I can actually 'thank' my former ''adviser'' for most of that I guess), I think that holding onto the good quality yield stuff I now have is better off than selling and somewhat rolling the dice again. 

In my experience, earlier in the year it turned out that it was hard to buy and loose (so far); so I guess I'm saying it was more easy to buy then. I feel fortunate about that. 

I'm not sure my current adviser-free skill level at current prices for most things is up for another test though and I do not see any better options. This why I'm trying to learn based on real input and experience from others like on this forum, paid adviser free. I'm also trying to learn the real-estate ropes too as an alternative to single stocks and ETFs.


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## james4beach (Nov 15, 2012)

HaroldCrump said:


> If you consider the Dow Jones Canada Growth Index, you'll see that this so-called "growth" sector 10 year returns are -2.40%.
> The iShares ETF that mirrors this (XCG) has returned 1.16% since its begining 4 years ago.
> This index has huge volatility, sometimes returning more than 20% in a year.
> So either you time your entry and exit with precision to capture these swings or you try hand-picking growth stocks to beat this index.
> ...


This is the only mention of XCG that I found in this forum. The post was from 2009-12-16.

And I think this provides an interesting historical contrast.

HaroldCrump mentioned how, back in 2009, the "growth" sector had a really disappointing 10 year return. So there was a 10 year period from roughly 1999-2009 with very poor growth stock returns. That was a period where the broader TSX Composite or TSX 60 did better.

But look at the next 10 year window after the above observation. Now the situation has flipped. XCG has a 10 year return of 6.53% which is about 1% better than XIC. Over the last few years, and last decade, growth is outperforming.

What's the message here? Growth underperformed in one decade, outperformed in another.

I am not sure whether we can expect growth stock-picks, or XCG, to outperform XIC in the long term and I doubt that picking individual stocks makes anything better. Many of us (myself included) are seeing great returns from picking individual growth stocks, but that's probably just because we're in a phase where growth stocks are doing very well.


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## milhouse (Nov 16, 2016)

To state the obvious, the general concensus is that timing doesn't work. However, is it realistic to identify decade long trends early enough to make adjustments/tweaks to one's portfolio and take advantage of the trend while it lasts? Ex. You start seeing growth stocks starting to outperform consistently over the course of 2 year, would that be enough for you to shift some of your accumulating portfolio there and would the trend last long enough to make it worth it?


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## Money172375 (Jun 29, 2018)

I’m having this debate now. I’m mid 40s and rely solely on dividend income. My non-reg component makes up about 60% of my overall portfolio. Non-reg and TFSA are all individual Canadian dividend payers (the usual suspects). I’ve yet to withdraw any income from the TFSAs. RSPs are all in xgro/vgro.

Portfolio has been operating like this since about 2017/2018.

this will be the first year of ONLY dividend income. Happy with the income level, but also wondering about the lack of future growth. Learned a new term “range bound”. Are the typical basket of Canadian dividend payouts range bound? feels Like the banks, telcos, pipelines, utilities, REITs won’t see growth in the next 20-25 years, like they did over the last 25.

so basically, I’m looking for some strategy to try and capture a little more growth in my non-reg while not losing too much income. Is XIC a simple way of doing this? Do Dividend growth” vs “dividend income” management styles still exist? is There a generally accepted ”investment income continuum” that could help with my thinking? Feel like I just want to push towards “growth” a little more in the non-reg. (recognize that I don’t hold any fixed income at all in non-reg. I was 100% equities through ‘08 and this year and didn’t lose sleep......even through a couple of Margin calls in ‘08/’09 - stupid idea of borrowing against bank stocks to buy more bank stocks in that time). Lol. at this point, I fell like I need a 4-4.5% yield on my non-reg to meet living expenses. 

Appreciate your thoughts...


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## like_to_retire (Oct 9, 2016)

Money172375 said:


> so basically, I’m looking for some strategy to try and capture a little more growth in my non-reg while not losing too much income. Is XIC a simple way of doing this? Do Dividend growth” vs “dividend income” management styles still exist?


I don't fully understand your meaning. Are you referring to total return growth? Are you referring to switching to non-dividend growth stocks that are a smaller cap and then you'll sell shares for your income? I don't really see switching to XIC from individual stocks as a positive shift if you're already handling individual stocks - you are no doubt already beating the index and getting XIC will introduce some losers into the mix.

ltr


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## Pluto (Sep 12, 2013)

Money172375 said:


> this will be the first year of ONLY dividend income. Happy with the income level, but also wondering about the lack of future growth. Learned a new term “range bound”. Are the typical basket of Canadian dividend payouts range bound? feels Like the banks, telcos, pipelines, utilities, REITs won’t see growth in the next 20-25 years, like they did over the last 25.
> 
> so basically, I’m looking for some strategy to try and capture a little more growth in my non-reg while not losing too much income. Is XIC a simple way of doing this? Do Dividend growth” vs “dividend income” management styles still exist?
> 
> Appreciate your thoughts...


yes, dividend growth styles exist. Based on your general description, probably most of your holdings increase their dividends regularly. Just read up on your holdings one by one to check on their dividend policy and holdings. 

Don't mess too much with what is working for you. don't assume there will be no growth in those type of stocks. No one can see ahead for 20-25 years. 

I have the same type of holdings as you: banks, telco, electric utility, pipelines. I realized I didn't need all the dividend income, so I sold some, about 20%, and put it into "growth" namely BABA, OTEX, BAM.A, BYD, GSY. Now I have more capital growth plus more than sufficient dividends. 

I don't really have any advice on what you should do except don't mess too much with what is working for you and check your stocks to ensure they have a history of dividend growth.


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## Pluto (Sep 12, 2013)

I don't see that XCG has under performed.


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