Do you think yield is more important than dividend growth?
- Thread starter Felix Hans
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I think yield is more important than dividend growth. This is because I believe that a company's dividend is an indication of how much money it can afford to pay out to its stockholders. If a company pays out most of its earnings as dividends, it will likely have a hard time paying for any new projects and additions that may be necessary for the company's survival. This will limit the growth potential of the company, especially if there are other companies competing with it for market share.
On the other hand, if a company chooses instead to reinvest its earnings into new projects and additions, then it will be able to grow in ways that would not otherwise be possible. This means that even if a company does not pay out much in dividends, it should still be able to increase its value over time by investing wisely.
Well, it depends on how you define "yield." If you're referring to the interest rate that your bank pays you, then yes. In that case, it's far more important than dividend growth.
But if you're talking about total return, or what's known as "total return on investment," which includes the value of dividends and capital gains, then no: we still need some kind of growth.
Let's say you have $10,000 cash sitting in a bank account that earns 3% interest per year. If you leave it there for 10 years and then take out $11,000 at the end of those 10 years, your total return is $2,000—which means your yield was 2%. (That's not even enough money to buy an iPhone X.)
Now let's say you have an investment portfolio worth $1 million with a 10% annualized return over a decade. That means at the end of 10 years, your portfolio will be worth $1.1 million—and if all you do is reinvest your dividends every quarter, then your total return will be 11% annually over those 10 years as well.