Dividend vs Growth Stocks: How Much Risk Should You Take?

what's up guys it's humphrey welcome back to my channel in my most recent video on how to invest for beginners i actually talked about the differences between passive investing and active investing now a strategy that many passive investors use is to buy etfs index funds and dividend paying stocks and while that may grow your wealth pretty consistently over time a lot of people want to know how can i grow it even faster so sometimes it is worth prioritizing some of your portfolio into positions that can actually gain you consistent returns and actually bigger returns over time after all if you did put ten thousand dollars into tesla stock back in 2012 at its ipo price of twenty four dollars a share well basically you would have bought 416 pre-split shares of tesla which multiplied by five is two thousand and eighty three shares of tesla today that ten thousand dollars would have been worth one point seven seven eight million dollars just about nine years later mother of god and since most of you guys watching are millennials and gen z what i wanted to talk about was something more along the lines of capital appreciation because that's a lot more important when you're younger is to take more risk on early on in your life so that you can build a large sum of capital so that then you can live off of those dividends or that passive income so today we're going to be talking about the differences between dividend stocks and growth stocks and how much of a percentage of each you want to have in your personal portfolio before we start one thing that does pay dividends down the line is actually tapping that like button and turning it blue because the more times you tap it and turn it blue the more that this video gets shared out to more and more people who hopefully will be educated on this type of information okay and with that let's start and talk about the differences between growth stocks and dividend paying stocks so first of all let's clear up a misconception because dividend paying stocks and growth stocks it's not like they're completely different companies they're all just companies that offer stock however they are called dividend paying stocks because of their characteristics in that that company pays dividends and they're called growth stocks in the characteristics of basically it has a lot of room to grow a company that pays dividends is typically more stable it has cash on their balance sheet to actually pay these dividends and most of the growth has already been done so that's great and all but dividend-paying stocks aren't typically known for their capital appreciation or their underlying share price appreciation what you're doing is you're mostly relying on the dividend income from a dividend paying stocks so that you can generate that passive income while you sleep which by the way is still very very cool and what's really cool is that some of these companies have been paying dividends for over 50 years which is absolutely crazy that means you don't have to do anything besides hold their shares and you get paid just for owning their shares gross stocks on the other hand are basically what they sound like they are companies that are in industries that still have a lot of room left to grow an example would be like the electrical vehicle market because there's still a lot of room to grow i don't feel like it's fully developed yet and tesla is a huge player in this space now these days there are some other companies trying to make a name for themselves in the ev market notably the ticker symbol nio gros stocks are still companies that are spending a lot of their money on r d and improving their products so they can do what they do best which is as their name implies grow a lot they typically don't pay dividends but their upside potential could be huge remember my tesla example from a little bit earlier but they're also stocks that could go out of business so they're super volatile in that regard remember some of the companies coming through the 2000.com bubble that failed or perhaps they could also just fail based on fraud or speculation such as nikola motors as of last year now just as an example i wanted to bring up a chart for you guys and basically show you some growth stocks that grew a lot from the years 2010 to 2020. you'll notice that if you invested in netflix in 2010 your thousand dollar investment just 10 years later would be worth over 40 times your initial investment other notable holdings here are domino's pizza and broadcom now i do think this list leaves out tesla because tesla ipo not in 2010 but a little bit later in 2012 but that would probably be the top of this chart if it were included another notable company that's missing on there is amazon and if you had a thousand dollars of amazon stock in 2010 well by the end of 2020 it would have been worth over 25 x your initial investment now at the bottom here you'll actually notice that the s p 500 if you invested a thousand dollars back in 2010 it would be worth about 3 570 or about 3.5 x in 10 years so you can already see the stark contrast between picking good growth stocks and actually just going with the standard index fund of the s p 500. so there is one caveat though that you need to be aware of is that i'm only showing you guys the top 10 winners of the decade now had you invested a thousand dollars into a company that went bankrupt while your thousand dollar investment would now be worth zero that's ideally why you want to have diversification within your portfolio so that in the case one does go bankrupt at least you have all the other companies there to basically bolster you up lastly i just want to bring up that there are some companies that offer a little bit of both like dividend yield and capital appreciation and the first company that comes to mind there is actually apple i will say though that apple is probably one of the biggest exceptions here and definitely not the rule so now that we know the difference between dividend stocks and growth stocks well how much of each should we have allocated in our portfolios now there's no right answer when it comes to this this all depends on who you actually are and how much risk that you can take if you want to take on more risk you can choose a selection of more growth stocks than dividend stocks in your portfolio and vice versa if you're less risky you want to choose more index funds etfs and dividend-paying stocks but let's actually talk about risk because knowing your risk tolerance will basically guide your investment decisions when it comes to this choice now first the younger that you are the more risk that you can generally take when you're younger you want to be taking on more risk because you have more time to make up for it especially if that risk doesn't go your way you have more opportunities ahead of you to make even more income and this also allows you to have more time for your investments to compound over time since you do have more time than other people that are investing basically if you're really young you can just keep some of your money into passive compounding investments and just let that do its thing over time and with the rest of your portfolio you can pick certain spots and try to just grow your capital even further so in general and this is all very general guys younger people tend to have more growth stocks in their portfolio so that they can take advantage of more risk so let's flip that and pretend that you're 55 and you want to retire in the next 10 years you probably want to have less of a concentration of growth stocks because well you're about to retire and you're going to need that cash so now i want to talk about how i would set up my portfolio if i was say age 18 or 21 at this time i'm also going to share with you how i'm thinking about my portfolio right now what it's currently like right now and how i'm going to change it moving forward so if i was personally 18 or 21 right now and i know that i'm more on the risk averse side i'm actually going to say that my actual ideal portfolio would be 70 growth and 30 passive investments so if i had 10 000 to invest that means 7 000 of that 10 000 would probably be in gross stocks and the rest would be in passive index tons etfs etc i think a lot of younger people these days are probably way more risky than i was especially at that age but for me i just was really afraid of losing money and i never really wanted to see that happen it just depends on how much risk you're comfortable with i could definitely see a successful portfolio for someone who's younger being 100 gross stocks or 80 or 90 gross stocks as well now personally i like to make up for my self-inflicted risk aversion by lifestyle choices so basically living below my means my goal is to basically keep my lifestyle the same while i increase my income and hopefully that difference of my expenses and my income actually make up for the fact that i'm a little bit more risk-averse when it comes to my investments and that way i'm just able to diversify my extra income into other types of investments such as income producing assets or something like real estate now my ideal holdings right now since i'm in my early 30s is actually closer to 50 50 so 50 growth and 50 dividend payers or passive index funds before i started content creation i would probably say my allocation was even more weighted towards passive investments just because i didn't really want to look at my investments from day to day these days though since i pay attention to the market quite a bit i'm actually okay with shifting a little bit of my percentages closer to more growth stocks than dividend paying stocks in the past so it is a little bit fluid in that regard and you can make adjustments on the fly as your risk tolerance changes throughout your life but the general rule is is as you get older more and more of your percentage of your portfolio will probably be shifted from gross stocks and to dividend payers and passive index funds so to summarize what should you do as an investor well i think there are three key things the first is to understand what your risk profile is so if you're riskier for your age you can take riskier bets with more growth stocks on the other hand maybe you just are more of a passive type of person and you just want to see your investments grow over time then there's nothing wrong with sticking with just index funds and etfs tracking let's say the s p 500. second you want to make a hypothesis about where the market is going right now we're in a bull market so dividend paying stocks tend to perform worse than gross stocks but let's say one day if that trend reverse and all of a sudden we're in what's called a bear market or the market it starts to go down grow stocks will lose their value quickly while dividend stocks are going to stay stable and continue to pay that dividend income third always diversify because no matter what happens in the market if you're diversified across a whole bunch of different holdings then even if one of those holdings goes to zero at least you have the rest to bolster up your portfolio i hope that this was helpful you guys make sure to drop a like on this video if you enjoyed that content subscribe to my channel for more personal finance and investing content in the future and also tick the notification bell because then you get notified whenever i drop a video if you like two free stocks from the weeble app whenever you deposit a hundred dollars use the link in my description below for that lastly thanks to all my patreon supporters i appreciate you guys being here a lot of you guys have just signed up in the last two weeks or so so i really appreciate that and i'll see you guys here in the next video peace

Channel: Humphrey Yang

Views: 80,359

Keywords: dividend investing, growth investing, passive income, value investing, dividend stocks, stock market, investing for beginners 2021, growth stocks 2021, investing in dividend stocks for beginners, asset allocation, what is asset allocation, portfolio allocation strategies, diversification portfolio, diversification, tesla, amazon, coca cola stock, square stock, tesla stock, dividend stocks for beginners, stock portfolio for new investors, growth stock portfolio

Id: uWf-KmHcUqY

Length: 9min 59sec (599 seconds)

Published: Mon Feb 08 2021