A prudent way to save up for the future has many investors putting their wealth into dividend-paying stocks and related exchange traded funds (ETFs). But an investor may wonder if he or she should be investing in dividend yield or dividend growth.
Stocks operating with high dividend yields could have recently experienced a drop in share prices or be an “out of favor” money maker, remarks ETF Guy for ETF Topics. A company could have also raised its dividend in the past and can be considered a dividend growth stock.
In a hypothetical situation, a dividend yield investor sees a 13.0% yield for a stock and a dividend growth investor sees a stock with 2.0% yield and an average annual dividend growth rate of 10.0%. It is calculated that the dividend yield stock will start paying out 5.0% in 10 years. But a dividend yielding stock does allow an investor to receive some extra money on a regular basis.
Investors utilizing dividend yield stocks have an opportunity to use higher dividend profits to either retire or grow an investment portfolio. Dividend growth stocks may not provide enough for retirees.
When investing into dividend stocks or ETFs, it is important to have your own strategy in place for the time frame you have in mind. ETF Guy thinks the obvious solution is to have a balanced investment in both dividend yield and dividend growth type stocks, but every investor is different. Consider your own goals and needs.
- SPDRS (SPY): yields 2.7%; up 0.8% year-to-date
- PowerShares International Dividend Achievers (PID): yields 3.4%; up 8.6% year-to-date
- PowerShares Dividend Achievers (PFM): yield 2.9%; down 9.0% year-to-date
- iShares Dow Jones Select Dividend Index (DVY): yield 5.5%; down 13.5% year-to-date
For more information on dividend ETFs, visit our dividend category.
Max Chen contributed to this article.