Most people tend to have the perception that when they choose to invest for dividend income, they are somehow not investing for growth.

This stems from the belief that dividend investing is solely for cash flow while growth investing is purely for capital gains. Is this really the case?

To know for sure, one must first gain an understanding of growth investing and how good dividend investors are in fact, really skilled at growing their capital over time.

What is growth investing?

There is a distinction between a genuine growth investor and the others who, in fact, are traders, speculators, and gamblers (TSG). As investors, it helps a great deal to separate the differences between an investor and TSGs who claim to be investors.

The key to separating them is to know the real definition of growth investing. For a start, most people tend to identify growth investors as people who aim to enjoy capital gains from their stock investments.

The deeper question is, ‘what are the driving factors for these capital gains?’ What are the bases for stocks to appreciate in stock prices?

Genuine growth investors will offer different insights to the above questions compared to TSGs. This is because investors believe that a stock only rises in price over time as it is reliant on its fundamental qualities.

In general, these qualities include a rise in customers, sales, profits, cash flow, assets as well as products and services that add value. All these qualities make a business more valuable.

Furthermore, the growth in stock price is not based on lofty ambition; it has to be backed by logic and common sense.

Growth investors are cash flow investors

Genuine growth investors in the stock market place great emphasis on the cash flow management of a stock before investing. This is similar to dividend investors.

Hence, one can safely say that growth and dividend investors both read cash flow statements. However, the motivation for reading them would be slightly different.

For instance, a dividend investor likes to know if the company (stock) can generate consistent operating cash flows so that he or she will earn dividend income consistently.

On the other hand, a growth investor looks for a company that brings in operating cash flow consistently so that the company can reinvest the cash flow back to its business via research and development activities, market expansion, business acquisitions and so on.

In simpler terms, growth investors want cash flow to be reinvested for growth, while dividend investors want cash flow to be paid to them in dividends. Thus it is a matter of preference and priority.

Most dividend investors are growth investors too

As an effective investor, you wouldn’t just invest into stocks for their current dividends but also for their future dividends.

As most dividend investors prefer to collect growing dividend income over time, they automatically invest in companies that are ambitious to pursue growth in the future.

Many of these companies tend to strike a balance between rewarding their existing shareholders with dividends while enhancing the company’s value with growth initiatives from their operating cash flows.

This explains how anyone can practice both dividend and growth investing at the same time.

The standard checklist

Both dividend and growth investors tend to use this checklist to assess a stock deal:

• Business Model: Has it evolved to be better over the last 10 years?
• Financial Strength: Has it been increasingly profitable for the last 10 years?
• Cash Flow 1: Did it consistently bring in operating or free cash flows?
• Cash Flow 2: How much cash does it have in the bank?
• Initiatives: Does it have any growth initiatives that it is pursuing?

A stock should pass these criteria before being classified as a growth stock.

Even so, whether you are a dividend or growth investor, you should still make sure your portfolio is properly balanced with the necessary dividends to boost your cashflow, as well as future growth opportunities.

This will only bring increased returns and solidify your investments even more.

This article first appeared in kclau.com

KC Lau’s first book Top Money Tips for Malaysians has sold thousands of copies. He launched the first online personal finance course specifically designed for Malaysians, entitled the Money Automation System. He also co-founded many other online financial courses including the Bursa Method, Property Method, Founder Method and REIT Method.