3 Reasons Why Some Stock Market Investors Seek Dividends Rather Than Growth: A Defense of Dividend-oriented Investors

Dividend-oriented investors do not seek out growth stocks in the stock market because they prefer dividends, and they have some pretty good reasons for their approach. While day-traders and other active traders try to predict which stock will experience rapid growth in the future (either short-term or long-term), dividend-oriented investors are content to keep their money in high-yield dividend stocks. Here are a few reasons why dividend-oriented investors do what they do:

Dividend-Oriented Investor Rationale #1: Stocks as income streams. Investors seek dividends rather than growth when they want a steady income over time. Growth-oriented investors buy a stock, hold it for a while, and then realize a gain (hopefully) when they sell. During the holding period, though, growth-oriented investors do not receive any income from the stock. Dividend-oriented investors buy a stock with the intent of holding it for the indefinite future, and receive a steady income of dividends (again, hopefully) until they eventually sell the stock, if they ever do. Dividend stocks can, therefore, be part of a strategy to create passive income for an investor over time.

Dividend-Oriented Investor Rationale #2: Avoidance of transaction costs. Even if dividend-producing stocks do not generate enough cash in the form of dividends to constitute a full income for an investor, the investor might still prefer dividend-bearing stocks to growth stocks. Because dividend stocks throw off income without the necessity of a sale (unlike growth stocks), dividend-oriented investors can invests for the long-term and avoid the transaction costs (i.e., bid-ask spread, brokerage fees, and price movement) that growth stock investors face.

Dividend-Oriented Investor Rationale #3: More accurate prediction of value. It is difficult to price stocks because there are so many unknown factors in any given case; this is particularly true for growth stocks, which are expected to grow (but which are not certain to do so). Dividend-bearing stocks are, arguably, easier to value than growth stocks because the stream of income from dividends can be used to conduct a valuation based on the present value of future cash flows. Dividend-oriented investors can feel more confident, therefore, that they know the value of the stocks they buy.

None of this means that investors should abandon growth stocks. Over the past year, small-cap growth stocks performed very well, and over the long-term they have produced impressive yields. However, there are good reasons for many investors' decision to focus on dividends rather than growth. The three arguments listed above support dividend-oriented investors' strategy.