The companies behind the stocks that we own are faced with a decision. They need to decide what to do with the profits that they generate. The outcome of this decision is critical to shareholders. It is essential because the use of profits can have profound effects on the future of the company and the value of its stock. This article will examine growth stocks with dividends and why it might be time for you to buy them.
One way of returning profits to shareholders is through cash dividends. If a company decides to pay a cash dividend, the money simply shows up in your account. Dividends are typically paid once a quarter. Though, a few companies pay annual or special dividends. For example, a mature company with limited growth prospects could decide to return profits to shareholders through dividends.
On the other hand, a growing company may decide that the best use of its profits is to reinvest it back into the company. In this case, the company can use profits to continue growing and reap larger profits in the future.
Of course, some growth stocks with dividends chose to do both. These companies make enough profit to fuel future growth and pay shareholders a dividend at the same time.
Growth Stocks With Dividends
In some cases, a growth company may be nearing an end to above-average growth. These companies may not require the same amount of profits to generate growth next year. So, they can both invest profits into the company and pay shareholders a dividend.
In other cases, a growth company may still be growing quickly, but future growth does not require a significant amount of this year’s profits. Companies in this situation may also choose to pay shareholders a dividend.
In most cases, companies that pay a dividend continue to pay a dividend for many years. So, growth companies with dividends may not pay a hefty dividend. They do this because they want to make sure they have enough profit in the future to continue to fuel growth without having to cut the dividend.
For example, a growth company may come along with a new product, service, or acquisition opportunity. If the company has committed to paying a hefty dividend out of its profits, it may not be able to take advantage of that opportunity.
Why Buy Growth Stocks with Dividends
Every investor wants to earn the highest return on their stock possible. In the end, there are two sources of returns. Those two sources are dividends and appreciation of the stock price. Growth stocks with dividends can offer the possibility of both.
Say you bought a stock for $100, and it goes up 10% in the first year that you own it. If the stock also paid you $1 (or 1% of $100) in dividends for the year, your total return is closer to 11%. On the other hand, had the company may have chosen to not pay a dividend, your total return would’ve been only 10%.
The extra 1% might not seem like much, but it makes a big difference in the long run. Say you have a $10,000 portfolio. If you earn 10% per year on your portfolio, you’d have $25,937 after ten years. If the same portfolio earns 11% every year, you have $28,394. That’s almost 9.5% more money.
After 20 years, the portfolio earning 10% would have $67,275. The same portfolio earning 11% would have $80,623. In this case, the portfolio earning 11% would have almost 20% more money!
This example illustrates the massive impact of compounding returns of even a tiny dividend from growth stocks with dividends.
A Few Examples
If you’re looking for considering growth stocks with dividends for your portfolio, here are a few stocks to think about.
- Apple (Nasdaq: AAPL): Most readers are familiar with Apple’s iPhones, iPads, and popular services like iTunes and Apple+. The company has grown its revenues and profits dramatically for many years. In fact, the stock is up over 366% over the last five years. Currently, the stock is about $164 and pays a quarterly dividend of $.22. The quarterly dividend equates to an annual dividend of $.88 per share and an annual dividend yield of .54%. That might not seem like much, but the company is likely to grow the dividend in the future.
- Microsoft (Nasdaq: MSFT): Microsoft is the maker of its popular Office software suite. The company also owns social media platform LinkedIn, gaming system Xbox, and its cloud-computing business Azure. Through the growth of its services and acquisitions, the stock is up over 362% over the last five years. The stock pays a quarterly dividend of $.62 per share, which gives shareholders an annual dividend yield of about .83%.
- Costco (Nasdaq: COST): Costco’s wholesale grocery stores have popped up quickly across the U.S. over the past several years. Shoppers pay an annual fee to buy bulk groceries at deep discounts to regular prices. The popularity of the stores has boosted the stock by over 238% over the past five years. The stock currently pays a quarterly dividend of $.70 per share, which yields about .56%.