I Have Been Investing Wrong This Whole Time

Missing out on growth

I’ve always been a dividend growth investor. I thought this was the fastest way to achieve financial freedom with minimal risk. But maybe I was wrong.

Dividend growth stocks have a long history of growing profits and distribute regular income to investors. I’ve blogged about how much I like them before. But recently I realized they have underperformed growth stocks, which have averaged 13% annual returns over the last decade.

Apparently dividend focused investors like myself have been missing out. πŸ™ I have been accumulating about 4 dividend stocks to 1 growth stock. In hindsight this was a mistake, and I should have done the inverse. It was a lesson in opportunity cost.

In today’s post I’ll explain why “growth stocks” will probably beat “dividend growth stocks” in the long run, and what I plan to do with my portfolio going forward.


Dividend stocks are great, but…

There’s nothing inherently wrong with dividend growth investing. In fact, a portfolio of dividend appreciating stocks will most likely beat the broad market index. According to a white paper from Hartford Funds, dividend growth investors should also experience lower volatility as an added bonus. πŸ™‚

There’s not much to complain about a 12.87% rate of return. My pal Bob from Tawcan.com just wrote a detailed blog post today on the best dividend stocks in Canada. Buying stocks with appreciating dividends is already a highly effective and reliable way to build wealth! πŸ˜€ No question.

But what if there’s something better? This is where growth stocks come in.

Here’s what the evidence tells us. Vanguard’s S&P 500 Growth ETF (VOOG) tracks the returns of U.S. growth stocks and has returned over 300% since 2011. Meanwhile the Dividend Appreciation ETF (VIG) holds companies with a record of growing their dividends year over year and has returned just over 200%.


What’s special about the growth factor?

There’s a simple reason why growth stocks tend to outperform. Profitable companies will generally do 2 things with their retained earnings:

  1. If a company is growing quickly and has a high return on invested capital, it will benefit shareholders the most by reinvesting profits back into its operations.
  2. If a company doesn’t see much opportunities for growth, it will reward shareholders with cash (or share buybacks.)

In other words, if a stock pays a dividend, its Board of Directors is essentially admitting that they cannot find a better use for their profits. Maybe they have reached maximum market penetration, or cannot expand internally or acquire competitors. Whatever the reason – paying out cash is the only way they can offer shareholder value since there is no better alternative use for the cash in a profitable way.

This is the driving force behind growth stock performance. They earn higher returns on investment and can make better use of capital compared to other types of businesses. πŸ™‚

Growth stocks can be quite volatile though. So even though they are appropriate for millennials like myself, perhaps dividend stocks are still better for older investors.


Getting the best tax advantage

I should have invested in more growth stocks from the beginning. There’s no need for dividend income when I have a full time job anyway. But once I quit working, I can gradually sell my growth stocks to buy dividend stocks to take full advantage of the dividend tax credit.

You can earn up to $50,000 a year in tax-free eligible dividends, as long as you don’t have a job. Maybe that’s not enough money to live on. But it’s better than a fisherman’s salary. Fishing is hard work, and it’s quite difficult to live off the net income. 😏


How the economy impacts growth stocks

The current low interest rate environment greatly benefits growth stock investors. Let’s say a growth company can generate 20% return on capital. If it can borrow money at 2% today and use the capital to grow its bottom line by 20%, then that’s an incredibly powerful use of financial leverage. πŸ˜€

On the other hand, dividend companies can’t take advantage of low borrowing costs to the same extent. Otherwise, they would reinvest their profits to maximize invested capital. Since I believe interest rates will continue to stay low for the foreseeable future, I expect growth stocks to continue performing well.


Portfolio changes

Looking at my equity portfolio, it appears my growth stocks (AMZN, NFLX, GOOG, FB, etc) have vastly outperformed my dividend growth stocks over the last 10 years. I think this trend will continue. So I am changing my investment strategy.

This is why last week I wrote about purchasing Open Text and Tesla stocks. I also bought Alimentation Couche-Tard, another growth stock, earlier in the month.

I’m not going to sell any of my existing dividend stocks. I plan to leave my job in a couple of years and will need the passive income so I’m a staunch buy and hold investor.

But I still have a long investment journey of 50 more years, assuming I live to see my 83rd birthday, lol. Since building long term wealth is my priority, dividend stocks doesn’t seem like the best way forward. From now on I will focus more on investing new money in growth companies. πŸ™‚



Random Useless Fact:

The median income for an electrician is $50,000 according to salary.com.



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03/01/2021 11:21 am

Same realization to me as well between 2013 to late 2018 I freezed up over 140k of my hard earned $$ focusing on building dividend portfolio. I was finally was in the stage to collect approximate $400 in monthly dividend by late 2018. This was a huge mistake for someone like me living in housing boom city like Toronto . I was renting an apartment and focusing on dividend investment lol..Opportunity cost had been huge as property value had skyrocketed also value of all growth stocks had grown exponentially vs my dividend portfolio . It was only when my friend who invested approximate 70k in pre construction condo in 2015 and started renting in late 2018 with $400 monthly cash flow positive return ( also condo value appreciated over 200k) I came to realize my mistake. In late 2018 I switched 50% of my dividend portfolio to growth portfolio buying Apple, Microsoft, shopify, Home Depot and Starbucks it was the best decision. In 2019 I also purchased a property. Both property value and growth stocks have performed far better than the dividend portfolio. Today I hold 50% dividend stocks and 50% growth stocks. I am looking to keep it the… Read more Β»

03/01/2021 2:42 pm

Yeah tech gain is a lot more than my dividend stocks there is no comparison, especially I switched into growth names during late 2018 market correction. unfortunately I sold 75% of my shopify holdings at $267 along with few other growth and dividend stocks to arrange for my house Down payment. i still hold a small position in shopify. I should have sold Bce and BNS which I am stilll holding since 2014. I thought I was holding safe names but looking back now especially BCE has done nothing. Although no one knows what future lies ahead The big lesson learned is to calculate the opportunity cost depending on where you live and also your life stage and plan it out accordingly

03/01/2021 1:37 pm

I think the biggest key here is diversifying upon careful planning. Most usually people just play into the market without a plan; whether if it’s because their co-worker or friend who’s telling them to invest, often we fail to devise a plan for investing… like the point you made, I absolutely agree with, older investors are more suited for dividend growth rather than the aggressive growth younger people are looking for thus we should all really plan ahead before going into the market; in terms of why are we investing? how are we investing? how do we take out our earnings? which kind of investment vehicle should I have or prioritize over the others? etc.

Financial Samurai
03/01/2021 3:52 pm

Thank you for saying this! I’ve been trying to encourage younger investors to invest in growth stocks for years! Once you think like an owner, there’s no way you are going to buy dividends stocks to build your nut quicker.

Elon Musk ain’t gonna pay a dividend. He’s going to reinvest his retained earnings BACK into his company for more than the measily dividend yield!

Anyway, during the next downturn, growth stocks it is!

But at least you still have gained a lot over the years!


03/01/2021 4:44 pm

Interesting perspective. I think a lot of investors have been going through this lately and having second thoughts about dividend investing. Could some FOMO be at play here? This is why I like set it and forget it ETFs; you get a little bit of the best of both worlds.

03/01/2021 8:09 pm

Great post as always. I love the puns and the memes.

While my blog is only focused on dividends, I also own a lot of growth stocks. Way more than dividend stocks. As you said, one of the problems with growth stocks is the higher volatility. The other is that growth stocks are heavily focused in the technology sector, as you can see from the top 10 holdings of VOOG. I’m looking to invest more into growth stocks this year too, in companies that I think are pretty safe (MSFT, GOOG, DIS, etc).

I think there’s room for both strategies (growth stocks and dividend growth) in a portfolio. It all depends on a person’s goals.

Shun Lee
03/02/2021 11:53 am

Same for me, 2020 was brutal and a wakeup call. I found out I was swimming half naked ! I sold off half of portfolio (mostly beaten up old fashion reits and fossil fuel div big caps) and went all into high growth tech like Tesla, Apple, Amazon, Square, Palantir, etc. Now the tricky part is HODLing it for next 5-10 yrs :))

freddy smidlap
03/02/2021 12:05 pm

good luck going forward. i’ve been owning high quality growth stocks since early ’15 and my portfolio has appreciated over 320% compared to 93% for vtsax. every stock i own is listed on the blog if you want to see what is in there.

i have some readers who are making this transition and this is my one word of caution i think you have already addressed: i would cost average into these growth names after such a huge run-up. even if i had a lump sum i would average in. after all we don’t even know some of the next great areas of growth right now. some of the best companies of the next 20 years might not have even been founded yet. best of luck going forward and happy investing.

03/02/2021 1:11 pm

Great post as always. What would sat about TEC on TSX vs VOOG/VIG . Since TEC can be be bought in CAD without paying conversion fees ?
Lately, ARKK is the talk of town. Not sure if all ETFs by ARK are worth their price?

Last edited 3 years ago by harry
03/04/2021 10:44 am

Very interesting. With Treasury yield increasing so rapidly recently we can see a nice sell off on growth stocks (today and last few sessions). I think current inflationary environment might actually start to finally support value/dividend stocks. We can see it clearly on the last few sessions when small/mid-cap (technology) is plummeting while value stocks are moving flat or even slightly higher. I would say it is a good time to invest in dividend stocks, but on the other hand you have a significant exposure to that and you look in a very long-term. In the next 50 years we will have better times when it is better to hold value and other times when it’s better to hold growth. No one knows what will happen – proper diversification is the only free lunch ! πŸ™‚

Mr. Dreamer @ VibrantDreamer
03/08/2021 4:45 pm

Don’t feel bad at all! Are the market new “crazy” highs influencing your thoughts? I really don’t think “From just sentimental perspective” the new highs are sustainable. Tech stocks went so crazy in 2020 and are getting bitten up lately. I have been thinking “a lot” lately and I concluded holding 40% in Canadian dividend paying stocks is a good move for me. 10% will be XIT or TEC (This is not a famous at all ETF and I still need to do some digging) but both hold Tech. XIT is CAD Tech and Tec is 85% US/CAD and 15% internanational Tech companies. Then there will be 50% in XAW and as you already know, XAW holds half in US Large- Market with highest holding in Apple, FB, Amazon, Microsoft, and the rest of 500+. This will add the exposure to tech growth market. In addition, I like the exposure to emerging market (And of course the international developed market). The main thing is, I just can’t justify buying big in growth stocks now. Need the market to cool down from the hype of “Vaccination going to do magic and economy will somehow just go in a rapid growth. I… Read more Β»

03/11/2021 4:31 am

Dude, you were trading on margin, at the time you’ve already calculated your risk and reward the dividend from the dividend paying stock would be more than the interests on the margin. Therefore, you’d always be on the winning side. At the time the market were on the 9 years run of the bull and due for a correction, and it was never corrected until last year of Covid. But we didn’t know that. The best decision is the decision that already been made! I Had to talk myself out of the regretful feeling of buying my house and paying it off (instead invest that money…yada yada), but I look at my co-worder who rent and rent and rent somemore, and that equivalent to move and move and move a lot. They had Pokemon Cards from 1999, but didn’t know where they were because they had moved so much. The cards that could be with $500K, or maybe $20K if it’s not in mint condition, they couldn’t find or dump it when they moved. If they had that stability of living in their own home, those cards would be intact or the chance of them in the attic somewhere is… Read more Β»

03/12/2021 11:33 am

Weeeeel I wouldnt jump to that conclusion that fast. Past 5-10y or so was hype stock craze investing. Your mentioned companies are overvalued heavily. If you add Testa, Apple and Microsoft you would have “missed out” even more growth. Calculating unearned profits is very dangerous, especialy from stock market price. You might end up in a very bad situation “investing” in bitcoin and Gamestop πŸ˜‰ Personaly I learned to stick to my strategy and dont change it on the way. I could even bet that thouse growth stock will not do that good in next 10y or so as a lot og their future growth is already calculated into the price.