Do large-cap growth stocks provide income?
As an asset class, large-cap growth stocks offer relative stability, great capital appreciation potential and, in many cases, a good dividend income – all very attractive qualities to have in a long-term investment.
Income stocks are sources of income
As its name suggests, income stocks can help create passive income for an investor through regular dividend payouts. Growth stocks, by comparison, typically don't pay dividends and instead reinvest any earnings back into the company. Amazon and Netflix are examples of growth stocks.
Growth funds also don't offer dividends or a means of earning monthly income. You're also most likely to need to stay in this fund for a longer time frame to take advantage of the growth. Income funds take on the opposite philosophy.
Some of the benefits of investing in large-cap funds are:
It's easier for investors to find and analyze public information about the fund or the underlying invested companies. For many, the large cap companies' mature market establishment has allowed them to institute and commit to high dividend payout ratios.
Large cap stocks are valued at greater than $10 billion in the market, making them more stable and mature investments. As a result, large cap stocks typically have lower volatility, greater analyst coverage, and perhaps a steady dividend stream.
Growth stocks are those companies expected to grow sales and earnings at a faster rate than the market average. Growth stocks often look expensive, trading at a high P/E ratio, but such valuations could actually be cheap if the company continues to grow rapidly which will drive the share price up.
Investors who purchase growth stocks receive returns from future capital appreciation (the difference between the amount paid for a stock and its current value), rather than dividends.
Possibility of value decline
Due to the very volatile nature of these stocks, growth funds will likely lose their initial investment. The value of these stocks will increase and decrease with market conditions.
The ideal income stock would have very low volatility, a dividend yield higher than the prevailing 10-year Treasury note rate, and a modest level of annual profit growth. Income stocks are different from growth stocks, which have higher volatility and risks associated with their performance.
If you are investing for the long term, you might emphasize growth. In this way, you will have time to weather a market downturn without changing your plans. Conversely, if you need quick cash to pay part of your living expenses or achieve a short-term goal, you may consider income investments.
Is large cap growth risky?
Large-cap stocks are generally considered to be safer investments than their mid- and small-cap stock counterparts because they are larger, more established companies with a proven track record.
Since index funds mimic benchmark funds, the returns will depend on whether they are comprised of value stocks, growth stocks, or both. Index funds tend to do better than value and growth stocks in the longer term.
- iShares® ESG Advanced MSCI USA ETF.
- Vanguard Growth ETF.
- Direxion NASDAQ-100® Equal Wtd ETF.
- JPMorgan US Momentum Factor ETF.
- Vanguard Mega Cap Growth ETF.
- iShares Morningstar Growth ETF.
- iShares Core S&P US Growth ETF.
While large cap funds, on an average, delivered an annual return of 16.15 percent. Mid cap funds delivered a return of 30.77 percent, and small caps gave the maximum average return of 34.29 per cent.
That's why the American Association of Individual Investors recommends that investors allocate only 20% to 25% of their portfolio to large-cap stock. That said, your asset allocation could differ from these types of guidelines based on your risk tolerance and investment goals.
While small-cap stocks can generate higher returns, they also have a higher risk profile. Conversely, large-cap stocks witness smaller growth but are more stable. Investors should consider investing in both for a balanced portfolio. FINRA.
For example, value stocks tend to outperform during bear markets and economic recessions, while growth stocks tend to excel during bull markets or periods of economic expansion. This factor should, therefore, be taken into account by shorter-term investors or those seeking to time the markets.
Finally, when it comes to overall long-term performance, there's no clear-cut winner between growth and value stocks. When economic conditions are good, growth stocks on average modestly outperform value stocks. During more difficult economic times, value stocks tend to hold up better.
Value dominance tends to assert itself when inflation is high, economic growth is strong and rates are elevated. By contrast, Growth stocks often outperform when inflation is low, economic growth is relatively weak and rates are low and falling.
| Stock | Implied upside from April 25 close* |
|---|---|
| Tesla Inc. (TSLA) | 23.4% |
| Mastercard Inc. (MA) | 19% |
| Salesforce Inc. (CRM) | 20.8% |
| Advanced Micro Devices Inc. (AMD) | 30.1% |
Should I focus on dividends or growth?
If you are looking to create wealth and have a longer time horizon, staying invested in growth will enable you to enjoy longer returns. But if you are looking for a more immediate return and steady cash flow, dividend investing could be the best choice for you.
| Stock | 2024 return through March 31 |
|---|---|
| SoundHound AI Inc. (SOUN) | 177.8% |
| Vera Therapeutics Inc. (VERA) | 180.4% |
| Avidity Biosciences Inc. (RNA) | 182% |
| Arcutis Biotherapeutics Inc. (ARQT) | 206.8% |
Disadvantages of growth stocks
These kinds of stocks are more susceptible to market fluctuations and economic downturns, exposing investors to increased risk and potential losses during turbulent periods.
In the short term, the returns in the form of capital gains are not significant and the dividends are usually not declared by the company. Hence the risk of investment in the short term is significantly higher in the case of growth stocks as compared to other stocks or investment options for a similar duration.
Typically, investors need a tolerance for risk and a holding period with a time horizon of five to ten years. Growth fund holdings often have high price-to-earnings (P/E) and price-to-sales (P/S) multiples. This trade-off from investors is the above-average revenue and earnings gains these companies produce.
