As a young investor, it is often the case that you hear or read about the need for your demographic to focus on growth stocks rather than value stocks. Thus, the message implies that young investors should stay away from high dividend yielding stocks (these stocks are almost always value stocks). Is this common knowledge a good investment strategy for young investors?
My experience as an investor (over 10 years now), leads to to believe that investing in high yielding dividend stocks can be a very smart and sound strategy for young investors. Often high yielding stocks are seen more as a defensive position than offensive, but this is not always the case. Often paying a sizable dividend is only part of their return on investment story.
Placing a heavy emphasis on growth stocks for young investors can open an investor up to a a significant amount of risk. When the risk taken is not in favor of the investor, recovering from the loss incurred will always take more energy to get back to par compared to the initial fall. (Classic example – Invest $100 then have a 50% drop in investment value = Account value of $50. To get back to $100 you must now find an investment that will double in value.)
The argument for investing in growth (higher risk) investments when your young is that any negative consequences from the excess risk you take will have a long period of time to work themselves out (recover from your losses). It’s assumed that not all growth investments will turn south. Therefore, given your time-frame, you should be able to capitalize on growth stocks that do succeed, which will more than negate the losses incurred from your other growth investments.
I believe a better strategy in today’s market exists for young investors. I do not have a study to point to. I am relying on experience and logic. My claim is that young investors in general should focus more on the following stock characteristics when developing a portfolio:
- High dividend yield (in today’s market I would think +4%).
- The size of the yield will be a factor in attracting investors to the stock based on the dividend yield alone. This is largely to be seen in this strategy as a defensive mechanism. A decline in stock price will cause the stock to be more attractive to new investors based on the larger dividend yield they will realize by purchasing the stock at a lower price (payout rate to price.)
- History of dividend payment growth (Think multiple years of history on this point. This also should (not always) help solve the question of whether the company can maintain their payment rate.)
- Showing a history of dividend payments speaks to the validity and viability of a company’s business model. Since this is historical information, you must also consider if anything might occur in the future to change the company’s ability to succeed.
- Historical dividend payment growth will not only cause you as an investor to realize a higher dividend yield, but it will also put pressure on the stock’s price to rise. As the yield rises, this will entice more investors to buy the stock (greater demand).
- A position in an emerging market (think countries) or industry. (This implies that though the company might be of the value stock persuasion, it still has room to grow.)
- With a successful product or service coupled with a position in an emerging market or industry, the company should be able to show investors greater value. With value comes valuation and higher valuations mean better (greater) stock price appreciation for investors.
- As a young investor, I understand and agree with the need for capturing companies that are growing. The caveat is that you do not necessarily need to flock to pure growth companies to benefit from this point.
What are some examples of stocks that would mesh well with this strategy?
Telefonica (TEF) – Provides fixed and mobile telephony services primarily in Spain, rest of Europe, and Latin America.
Sasol (SSL) – An integrated energy and chemical company operating out of South Africa.
Line (LINE) – An independent oil and natural gas company, engages in the development and acquisition of gas and oil properties in the United States.
Energy Transfer Partners (ETP) – Engages in the natural gas midstream, and intrastate transportation and storage businesses in the United States.
Verizon (VZ) – Provides communication services in the United States and internationally.
BCE, Inc. (BCE) – Provides a suite of communication services to residential and business customers primarily in Canada.
Bottom line – Do not become obsessed with growth stocks. You can get as good or better returns with less risk if you look towards value companies that are paying strong dividends. Simply because a company pays a sizable dividend, does not mean that its share price is going to grow minimally in the future. Consider how this strategy might work for you and do your research. Again, this is not to stay young investors should run from growth stocks, but they should not shun other opportunities because they have been told more than enough times that they should embrace stocks that are only growth oriented.