High Yield Or High Growth: Which Belongs In Your Portfolio?

Summary

• Are higher-yield or higher-growth stocks better for your portfolio?
• What considerations should be made when answering that question?
• This research will look at projected total returns, yield on cost, and income for varying dividend yields and growth rates over multiple time periods.
• The Chowder Rule is also examined to show how it works as a quick scan for potential investments.

Should I be investing in stocks that have high yield to provide future income or would I be better off buying high growth companies for the capital gains they provide?

This is an often debated question on Seeking Alpha, and the discussion can actually get fairly heated from time to time in the comment threads following articles.

For example, following this recent article, member David Stein stated that it is better for a retired investor to own a preferred stock with a 6% yield and zero growth than a growth stock with a 3% yield and a 4% dividend growth rate. He was quickly rebuked by others who said the growth stock is better because it is hedged against inflation and provides a growing income. To which he responded that inflation protection isn't really needed because the preferred offers twice the initial yield.

This dialogue went back and forth for some time, with neither side really doing much to convince the other to change their minds. It turns out, neither of them were really wrong either, because the investing goals for each of them is different. Mr. Stein is in his late 60's and relying on his portfolio for income, while the others are still a few years off and are still accumulating their nest eggs. Different circumstances lead to different viewpoints on what the ideal investment is for an individual's portfolio.

I had been thinking of writing on this topic for some time, and had some extra motivation after another reader, BeatlesRockerTom, contacted me in late April with a request to further expand on the differences between investing in high growth/low yield and low growth/high yield stocks over extended time frames.

Here is his inquiry, with some formatting/editing done by me to more clearly present his thoughts:

Hey Eric, Tom "Beatles

Analyst’s Disclosure:I am/we are long BDX, WBA, XEL, D. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am a Civil Engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.