I’ve been watching a lot of Disney movies lately thanks to two kids who are obsessed with princesses. Most recently, Beauty & the Beast came on, so the phrase “tale as old as time,” comes to mind which can be applied in the context of the dividend versus growth stock debate.
While it may not be old as time, it certainly is an old debate. One that still crops up again and again, especially during troubled times like the current market correction.
Sure, the TSX is now only down by 7.75% year-to-date as of this writing. But it’s still in market correction territory, falling from 2022 highs. So what’s the fastest way to make your cash back?
Today, I’ll seek to come to somewhat of a conclusion on the dividend versus growth stock debate. All through the exciting use of mathematics.
1 Growth stock
Alright, so let’s first look at a historically well-known Canadian growth stock. In this instance, I’m going to go back 20 years, back to the days when I was young, carefree and didn’t have two children spilling goldfish all over my couch. Instead, I was the goldfish-spilling tween watching cartoons. And when I wasn’t doing that, I was on the internet.
Motley Fool investors may remember this time vividly. The peak of the dot-com bubble came in August of 2000, hitting its trough by September of 2002 when it fell by 43.2%. And one of the tech stocks that was part of this growth phenomenon was Open Text (TSX: OTEX)(NASDAQ: OTEX).
Open Text was a growth stock that surged by 143% amid the growth that came when the dot-com bubble burst. But after peaking in 2004, shares started to drop over the next two years. Yet long-term holders will know, shares are now up 1,303% over the last two decades.
The question is, can you stomach it? Open Text has remained a growth stock, true. But it’s been one that’s fallen over and over. It’s been on a roller coaster that ends well, but perhaps not for those who need fast cash. While your shares could be up for years, a sudden fall in the market could result in losing it all in a flash.
Still, a 20-year investment of $10,000 in Open Text would be worth $80,000 today.
1 Dividend stock
Alright, so what if you don’t have the iron stomach that’s required for growth stock territory? Will your gains be as great? Most think the answer is no, as we’ve all heard stories of that one guy who invested in Amazon at like $0.15. I’m pretty sure that was never an actual share price.
So instead, let’s take a super safe stance and consider the Big Six Banks. It’s true that during a recession these stocks fall. But honestly, they don’t deserve it. Each have provisions in place for loan losses that have allowed shares to climb to pre-fall highs within a year. Compare that to a growth stock like Open Text, where in some cases, shares took years to come back.
Now let’s imagine that 20 years ago you picked up some shares of Bank of Montreal (TSX: BMO)(NYSE: BMO). You then reinvested the dividend you received from the bank as the dividend stock grew. Now BMO doesn’t have the growth trajectory of Open Text, up 708% to date over the last 20 years. But it hasn’t seen the massive falls either.
After investing that same $10,000 in this dividend stock instead of a growth stock and reinvesting your dividends, Motley Fool investors could be sitting on $263,638. Those are real numbers, not imaginary, could happen, may happen numbers. That’s what you would have, right now.
Bottom line
The feud is settled. The numbers are there. If you were to invest in a dividend stock and reinvest your dividends, Motley Fool investors could have more than triple the funds they’d have from the same investment in a growth stock. Now that’s exciting.
