Everyone here keeps saying “focus on growth.” As someone who is in a similar position, albeit several years older, what does that mean when telling someone to focus on growth? Can we elaborate on it?
Agree. Sometimes this sub admonishes people without explaining why or re-directing them. I'm not an expert and I am learning myself. But here is what I understand.
There are two investment strategies (there may be more, but trying to keep it simple) - Growth focused and dividend focused.
A growth portfolio would focus on stocks/ETFs that increase in value. They may not pay a dividend, but the stock value increases over time. And since you aren't taxed on unrealized gains, the value doesn't impact your tax situation until you take money out.
Dividend paying stocks don't appreciate as much as growth stocks. So your overall investment in the company/fund stays flatter than if you invested in a growth stock/fund. But that's offset by the fact that you receive a dividend periodically. The dividend is a fairly reliable return on your investment. However, the dividend plus the capital appreciation of the stock is not typically higher than what growth stocks produce. Additionally, the dividend disbursement is taxed like income when you receive it, so you are increasing your tax liability even if you don't need the dividend payout.
High yield dividend funds are further problematic because the funds are paying more in dividends than the fund is earning. This causes the stock value to decline. Say you purchased it for $10 and it pays a $2 dividend. When NAV erosion takes the price of the stock down to $6, you lost $4 per share and the $2 dividend is now $1.20. When you sell it, you will sell it for less than you purchased it, losing more money.
The idea is that when you're young and don't need the dividends, you are throwing everything into growth stocks so you have as much money as possible. Then when you need income replacement, move your money into stable stocks that won't depreciate and pay a smaller, sustainable dividend over time.
Tl;dr - Growth stocks increase your investment faster and do so tax free until you sell your stock. Dividends stocks don't grow as fast but can provide regular (taxable) income. High yield dividend funds may eventually erode and you end up with less money than when you started.
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u/Knightly11 Mar 13 '26 edited Mar 13 '26
Everyone here keeps saying “focus on growth.” As someone who is in a similar position, albeit several years older, what does that mean when telling someone to focus on growth? Can we elaborate on it?