By Hunter Larson

Financial adviser

When talking about market returns, there are two types of returns to consider: dividends and capital appreciation. Dividend returns are commonly associated with value stocks, while capital appreciation is linked to growth stocks. I will dig further into what it means to invest in a growth stock versus a value stock and what kinds of investors are attracted to each style.

Growth stocks (e.g. Amazon, Google) are shares in companies with a potential for growth in the near future and a growth rate that is faster than the overall markets. They usually don’t pay a dividend, as the companies believe reinvesting earnings in their own company is the best use of capital. Individuals that invest their money in these companies are hoping the stock price will increase. This difference between the cost and current value of the investment is that investor’s return, also referred to as a capital gain (or loss).

While value stocks (e.g. Coca-Cola, Johnson & Johnson) can also have capital appreciation, these stocks almost always pay a dividend and are usually shares in mature companies with already established businesses. Investors who purchase stock in these companies are usually looking for dividend income, as well as safer investments in case of a market downturn. Value companies tend to be more defensive when the market declines, meaning they are more apt to decline less than growth stocks because of the nature of the products or services they provide.

Different investment objectives may impact a client’s allocation in stocks that provide dividend income and capital appreciation. In other words, investors looking for dividend income will focus on value stocks and those who are investing to grow their asset base will turn to capital appreciation.

Since bonds and other income-providing vehicles have been paying such low interest, investors have tried to compensate by buying higher-yielding stocks. If a client’s investment objective is dividend income, the client will likely search for a value stock that pays a high dividend. For a retired investor, the resulting dividend income could help pay for the lack of wage income during retirement.

Conversely, investors looking to grow their assets will likely turn toward growth stocks to fulfill their investment objectives. These stocks have a tendency to be riskier than value stocks, which can also mean higher potential capital appreciation return. A common reason to have capital appreciation as an investment objective is so that retirement assets have time to grow to a certain level where they can provide enough dividend income to help pay for retirement. Once those assets have reached the level the client desires, the client may start switching over to a more value-oriented portfolio.

In general, if an investor has positions in stocks, it may be beneficial to have a decent amount of exposure to both value and growth stocks. However, investors who are looking to retire soon and need income may be better off looking to invest in dividend-paying value stocks. Investors who are looking to invest for long-term growth may be more inclined to invest in growth stocks. It is not the age that matters; it is the financial situation of the investor.

Hunter Larson joined D.A. Davidson in 2015 as a research associate before accepting a position as financial adviser in Aberdeen.