Growth, value, dividend and broad-market strategies
- Describe four common strategies
- Know the typical risks of each
- Understand why styles take turns leading
Growth investing
Growth investors look for companies expanding revenue and earnings faster than average, and accept high valuations to own them. The risk is paying too much: if growth slows, the stock can fall sharply even while the company is still growing.
Value investing
Value investors look for stocks trading cheaply relative to earnings, cash flow or assets, betting the market is too pessimistic. The risk is the value trap: some cheap stocks are cheap because the business is in decline.
Dividend investing
Dividend investors favour companies that pay steady and growing dividends. Income can be reassuring, but a very high yield can signal that the market expects a cut. Check whether free cash flow comfortably covers the payout; the payout ratio (dividends ÷ earnings) helps.
Broad-market investing
Broad-market (passive) investors buy the whole market through index funds and accept the market’s return minus very low fees. They give up the chance to beat the market in exchange for low cost, simplicity and full diversification.
Over long periods, many actively managed funds have trailed their benchmark index after fees.
Styles take turns
Growth and value have each led for years at a time. Nobody reliably predicts the switch. Choosing a style you can stick with through its bad years matters more than picking this year’s winner.
A company pays $3 per share a year and trades at $30: a 10% yield. If its earnings are $2.50 per share, the payout ratio is 120%. It is paying out more than it earns, which is hard to sustain.
Another pays $1.20 on a $40 stock (3% yield) with earnings of $4 (30% payout). Lower yield, far more room to keep paying and growing the dividend.
Key terms
- Growth investing
- Favouring companies expected to grow faster than average, often at higher valuations.
- Value investing
- Favouring stocks that look cheap relative to fundamentals.
- Dividend investing
- Favouring companies that pay steady or growing dividends.
- Payout ratio
- Dividends divided by earnings.
- Passive investing
- Buying a whole market or index rather than choosing individual securities.
- Active management
- Choosing investments in an attempt to beat a benchmark.
Use the Screener to build one ‘value’ screen (low P/E) and one ‘growth’ screen (high revenue growth). Compare how many stocks each finds and which sectors appear.
Key takeaways
- Growth, value, dividend and passive are different trade-offs.
- Each has a characteristic risk: overpaying, value traps, dividend cuts, or never beating the market.
- Styles take turns leading.
- Pick an approach you can hold through its bad years.