Do You Want a Higher Dividend Payout Ratio or Stock Growth?

By: Geri Terzo

Investors can increase their holding by reinvesting dividends back into the company.

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Choosing stocks that hold promise of rising market values or dependable dividend payments really depends on the types of goals an investor holds. Dividend yields are attractive, but if they are coupled with a falling stock price, the investor may lose money on the investment. On the other hand, a growing stock price is rewarding, but companies with excess profits that choose not to pay dividends may not be giving shareholders the best value.


If an investor wants to supplement income at a certain time in life, such as retirement, he may benefit from stocks that pay high dividends. Many companies have paid quarterly dividends without interruption for decades. With this type of a track record, an investor who is somewhat reliant on the income stream that dividend stocks provide might find more stability in a higher dividend payout versus unpredictable stock growth.


While there are many benefits to investing for the long term, sometimes investors just want to turn a quick profit. Dividends are generally paid quarterly and that timetable may not be realistic for someone looking for faster gains. Instead, stocks that have the potential to grow are more appropriate. Ideally, an investor should identify stocks that appear positioned to grow in value -- ones that show rising profits and revenues. While a stock price isn't guaranteed to reach its potential, if and when it does, the investor can sell shares for an immediate profit.


Companies cannot promise to remain profitable or that the market values of their stocks will grow, but investors can lean somewhat on historical track records to make stock selections. Certain stocks by nature pay higher dividends to investors, while the market value of the security tends to trade modestly. Real estate investment trusts (REITs) are one such investment. These issuers are required to distribute the lion's share of profits back to investors in exchange for tax benefits.


When deciding between a stock that has a high dividend payout or one with a rising stock price, investors should consider that they can have the best of both worlds. It may require some research to identify stocks that historically have used profits to pay dividends while at the same time posting gains in the market price, but this combination is available to investors.



About the Author

Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.

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