Do Large Cap Stocks Outperform Small Caps If Dividends Are Reinvested?
Small cap stocks traditionally outpace large cap stocks over the long haul. When dividends from large cap stocks are reinvested, however, the gap becomes smaller or even surpassed -- it really depends on the company itself. Large cap stocks in specific industries are more likely than other large caps to generate higher returns.
Small Cap Stocks
Small cap stocks are stocks with market capitalization of less than a $1 billion dollars, meaning the combined value of all the outstanding shares of the company is less than $1 billion. Since they have more growth potential than their larger competitors, they typically produce higher returns but have inherently higher risk. They also don't usually pay dividends; instead, they use their excess revenues for investment growth.
Large Cap Stocks
Large cap stocks are the mainstays of the economy. They typically have at least $10 billion or more in market capitalization and pay dividends. Their growth isn't nearly what a small cap stock's would be because of their size, but if the dividends are reinvested, it helps multiply the investment factor.
The sector in which a large cap stock operates in can be a defining factor in whether reinvested dividends produce higher returns than a small cap stock. As of the date of publication, technology and pharmaceuticals stand the best chance, because of innovation that is potentially revolutionary and produces newly-patented products. Medical breakthroughs can easily send a large pharmaceutical company's stock higher.
When determining whether large cap stocks that pay dividends or small cap stocks produce better returns, you need to look at the company in which they are investing in first. There's no hard and fast evidence to say which is better. Some small cap stocks never make it and some large cap stocks stagnate.
- Fundamentals of Investments for Financial Planning; Walt J. Woerheide et al.
- Planning for Business Owners and Professionals; Ted Kurlowicz et. al
Daniel Cross resides in Florida and has been writing investment and financial articles since 2005. He holds the Chartered Financial Consultant designation from the American College in Bryn Mawr, Pennsylvania.