The Age of Growth Stocks: Do They Fit in Your Portfolio?
If you asked an investment advisor ten years ago if they would recommend you hold a stock that didn’t pay a dividend for your long-term wealth building plan, they would have probably laughed at you. The idea that a company could be solid enough to realistically place large sums of money into, and not pay their shareholders a dividend just sounded outrageous. I ran into this as late as 2019, when the firm I was in charge of building models refused to replace Lincoln Financial with Amazon, all because Amazon was “too volatile” because they didn’t pay a dividend. Well, in that span, Amazon is up 87% and Lincoln is down 16%. But hey, it pays a dividend!
The age of solid growth stocks is upon us, and whether we agree with it or not, the reason for Amazon’s massive explosion in the online retail game is in part because they don’t pay a dividend. They use all their profit aiming at growth. More hubs, more products, faster shipping time, same day grocery delivery and so on. Are there still solid companies that pay a dividend? Sure, but that doesn’t mean the dividend should be the deciding factor on if you hold a position for your long-term goals. This is also not to say that we shouldn’t hold a stock because it pays a dividend. There are plenty of solid holds that will add diversification and mitigate some market risk, but also have a very bright future ahead of them. One in particular that comes to mind is General Motors, which has solid sales records dating back 100 years, but is also at the very forefront of autonomous and electric vehicle technology. It’s for this reason that GM, not Tesla, is in our stock model.
The way of the market is changing, and we either adapt or get flattened. The fear of holding companies that don’t pay a dividend is unfounded, especially if that is the sole gatekeeper. Twenty years ago, dividend stocks were seen as safer. They are making money, so they pay a dividend. In 2021, a lot of companies are making money, and rapidly expanding, using the cash that could go to a dividend thinking about future profits. I don’t know about you, but I would rather have a 10% growth company that has no dividend, than a 4% growth and 1% dividend. When I think of the four companies with the most power in our everyday lives (especially after 2020), I see Apple, Amazon, Facebook and Google, and only one of them pays a dividend.
Our objective is to get the best risk adjusted return, and in 2021, there will be some growth stocks that help us do that.
-Colin Feller, President