The 3 Basic Stock Types - Dividends, Growth and Cyclical

What are dividend stocks? Its basically companies that provides you a stable dividend year after year.. for example in the Singapore stock market investors love holding REITS and Banks to collect a 4% to 5% tax free dividend yield year after year. Do note that for the US market there is a 30% dividend tax so its not worth it chasing for dividends in the US market.

Over the past decade dividend stocks has been very popular as the common folks learn about FIRE, financial independence retire early. Basically investors hope to build a portfolio worth $500,000 to $1,000,000 to generate tons of passive dividends so as to cover their yearly living expenses… so they work hard for 10 to 20 years… saving a lot of money along the way to keep purchasing bank and reits for dividend income… once they hit their 1 million dollar portfolio they quit their jobs and live off the dividend income… its pretty straight forward.

The problem now from 2020 into 2030 would be the hyper inflation… the US feds are unable to hide the ugly inflation that is showing up now… the numbers shown to the layman is only 5% ... and they are saying its temporary… but if we use the traditional methods of calculating.. inflation could be as high as 15% for 2021 already and I do not think inflation will disappear in 2022. If your cost of living is jumping 5% to 15% a year.. then collect 5% dividends is less attractive as the cost of paying rents, buying food, paying utility bills is so pressurizing.

What are growth stocks? Growth stocks are basically stocks that pay little to no dividends, as the company thinks its better to retain the capital than to pay it out… the profits made are used for research and development, launching new products or business units, overseas expansion or acquisitions…

so instead of going for a stable 5% dividend return the shareholder is hoping to see capital gains of 10% to 20% a year… this capital appreciation over the long run should be tied to the earnings per share figure. For a example a stock earnings $1 and growing pretty decently… it could be worth 20 times earnings at $20 stock price… so it retains all in earnings and manages to grow earnings by 20% to $1.20 the next year… so if the market continues to price it at 20 times earnings the stock price should trade near its fair value of $24! that is a whopping gain of $4 or 20% a year!

Technology stocks are the biggest growth stock now as they push to capture market share and grab new consumers think e-commerce, think digital payment, think cloud computing, think tiktok short form videos… growth rates of 20% to 50% happening due to the shift in habits and this new segment growing so rapidly

The risks for growth stocks are much higher as compared to dividend stocks. For a dividend stock if the stock falls 50% the yield goes up from 5% to 10%… so this creates a base price for the stock… if 7.5% is a very attractive yield then the stock can at most only fall 25%…as the lower the stock price the more attractive the yields for bargain hunters.

But for growth stocks the downside is much more painful than dividend stocks, growth stocks are not defensive as we saw how Chinese tech stocks fell 50% to 80% from their peak… even big tech names in the US like Facebook and Amazon has ever fell 50% from their peaks before… however higher risk higher returns.. if you want to look for higher returns of 10% to 20% range you have to own some growth stocks… if you are 100% dividend stocks then the 5% dividend returns is just way too slow.. you do not really grow your wealth but rather your wealth is created mostly by your savings.

The last stock type is Cyclical and this is the highest risk and highest reward for example industries like Property, Commodities and Shipping… it was not long ago that we had a down cycle in 2020 in which Oil prices when to nearly zero.. now Oil prices has gone on a tear to shoot pass $80! Cyclical stocks are all about understanding the up and down cycles… you want to buy during the down cycle and sell during the up cycle… buy low sell high.. sounds simple but investors often get it wrong… and often newbie investors would mistake Cyclical stocks as growth stocks!

Right now we are at the peak of the Up Cycle... Property prices at new highs, commodities like Oil, Steel, Lumber making new highs, Electricity at high prices and Shipping at sky prices! Is this the time to buy into Cyclical stocks? of course not.. yet newbie investors who do not understand this will buy at the current prices to chase for new highs… when the down cycle comes you can easily lose 50% to 100% of your capital by mistaking getting in at the peak… weak cyclical stocks which are over leveraged often go bankrupt during the down cycle!

The best time to buy Cyclical stocks is when the economy is in a recession, in which companies are going bankrupt… while competitors have dropped out of the industry and only a few strong names are left as they held a conservative balance sheet that helped them survive the recession… although everyone became loss making and the stock prices have fell drastically… its now the best time to buy and wait for a recovery.. when you bought during the darkest hours and hold it till recovery…. you can often make twice to 5 times your money on a correct up cycle… basically this part is super high risk super high reward… and you understanding of the industry is super important

I had tried investing in Cyclical stocks in the past… property, commodities, marine, energy etc… but overall I had some wins and some losses and did not really do well in this area

I think I had most of my wins in the growth stock area… my biggest win was buying a 10 cent stock called Challenger technologies, a retailer of IT products… it grew from 8 stocks to 30 stores island wide… earnings grew at 30% clip per year for 5 years and I saw the stock price 5x into 50 cents… I then sold off as the trend had changed and online shopping was slowly taking shape… so the saying goes… u cannot buy and hold blindly.. you must keep following the fundamentals.. its been 8 years since I sold and its stock price has still remained stagnant instead it had been a dividend play due to its mature business as it provides its shareholders with a 5% dividends.

In the past banks were growth stocks, but now they are basically dividend stocks as they have matured… you are basically just in for the 4% or 5% dividends… its really hard for them to grow fast anymore… and from 2022 onwards they will have to defend their marketshare strongly from digital banks.. margins will be compressed, earnings will be stagnant… investors who do not understand this point will be foolishly getting the local banks at peak prices, peak earnings with little upside yet tons of downside potential.

In a portfolio there is nothing wrong to mix all 3 stock types of Dividends, Growth and Cyclicals to balance things out… I used to hold all 3 types in the past.. but now I have growth stronger and wiser… I prefer to specialize… I know I have an edge on growth stocks so I prefer a portfolio of 100% growth stocks… I no longer like Dividend stocks as they will be high hard when rates goes up and when inflation rages… I do not want to hold REITS for sure..

But for a normal retail investor its okay to go for half dividend and half growth… its okay to hold some banks/reits for dividends and hold some US/China tech stocks like FAAMG and BAT for growth… a balanced approach can still yield u 5% to 15% long term returns which is great! plus you sleep well at night

even a pure 100% dividend portfolio makes sense if u are already retired or aged passed 50… if you have 2 million dollars in banks and reits, nothing is wrong to collect 5% a year… or about $100,000 a year or $8,000 a month… if u are collecting that much.. dont give a fuck to inflation.. just take your monthly payout and spend it, enjoy your life and color your retirement!

cheers

ML