Being a dividend investor, and knowing growth investing is of a different slant, I was asked a few times on my take of having growth stocks in The Bedokian Portfolio. I had mentioned that The Bedokian Portfolio caters to growth, dividend and a little bit of both.
Before I give my opinion, let us take a look at the basis behind growth and dividend (or income) investing.
It’s About The Returns
Investing 101: Returns = Capital Gains + Income
Capital gains, as we know it, derives from the price appreciation of the asset. Income is either the dividend/coupon/interest that is paid out from holding the asset.
Growth investing focuses more on the capital gains component and investors in this school of thought pay attention to companies that are growing fast and/or in high-growth sectors such as technology and pharmaceuticals. New and upcoming companies, sectors/industries and countries/regions also belong to the growth category.
Dividend investing, on the other hand, emphasizes more on the income part. Dividend investors prefer this investment style as there is a deemed constant income stream from their assets. Companies from established sectors such as banks and utilities, and REITs pay out periodic dividends. Bonds, too, belong to this group as they pay out regular coupons.
Balancing Growth And Dividend Investing
For me, I would see the growth-dividend divide as a form of higher profitability versus longer sustainability. Growth investing gives higher returns but may not be sustainable (i.e. what is the next growth sector to go into after I had cashed out my gains? And can I repeatedly get the same returns?), while dividend investing provides realised returns from income almost constantly but are typically lower than growth’s in a given period.
The best, of course, is to strike a balance between these two, and there are three main ways on going about this: balance by age, balance by weightage or a mix of both.
Balance By Age
In most investment literature, it is encouraged that young investors in their 20s and 30s to have an aggressive portfolio, which means a majority of it is made up of equities. The Bedokian Portfolio has a suggested mix catered to this group in the form of 40% equities, 40% REITs, 10% bonds, 5% commodities and 5% cash1. Since growth comes from equities, the entire 40% could be dedicated to it, with the REITs and bonds providing the income stream. As one gets older, the growth equities will be reduced to 35% and eventually 20%, if going by The Bedokian Portfolio’s age category2.
Balance By Weightage
If a complete growth component in your equities portion is unsettling for you, then you may want to consider having a 50-50 split (or any other ratio) between growth and dividend, and make this ratio fixed throughout your investing life. With the variety of securities and financial instruments available, you can work out a number of combinations (e.g. 50% dividend ETF and 50% growth ETF).
Balance With A Mix Of Both
This balance features elements from the above two sections, and in gist by having a higher proportion of growth equities to dividend equities during the younger years, and increase the latter component as you get older, while reducing the overall equities proportion in your Bedokian Portfolio simultaneously.
1, 2 – The Bedokian Portfolio, p72