What is the Difference Between Value Stocks and Dividend Stocks?

Investors often treat stocks the same way. If a company pays a dividend, it’s considered stock for dividend investors. On the other hand, if a company does not pay dividends, it’s considered an investment for value investors. 

The two concepts are not mutually exclusive and so there may be situations where you will find yourself in one camp or the other. So what is the difference between value stocks and dividend stocks? Let’s break it down.

What is a Value Stock?

A value stock is any equity that earns a higher return than the market average. This can either be through a higher or lower price compared to the rest of the market or through a better cash return or dividend payment.

For example, let’s say there are two companies in your portfolio. Company-A has a price-to-earnings (P/E) ratio of 10 and pays an annual dividend of 0.5% of its share price. Company B has a price-to-earnings (P/E) ratio of 20 and does not pay a dividend. The return from owning a single share of Company A is 10% (10% return from dividends) while a share of Company B brings in 20% from dividends alone. Since the price of Company B is higher, the combined return from owning both stocks is 20% (10% for A and 10% for B).

What is a Dividend Stock?

Dividend-paying equity is any stock that pays a dividend at some point. The amount of the dividend is also dependent on the company’s earnings and is determined by the Board of Directors. 

The higher the earnings, the higher the dividend. For example, let’s say you have two publicly listed companies in your portfolio. 

Company A is a dividend stock because it pays a dividend of 1% of its share price each year. 

Company B does not pay a dividend and has a share price of 10. The combined return from owning both stocks is 10%. This is because, while owning A brings in a 1% dividend, B shares bring in a 10% return in the market. 

You are better off owning A alone, despite the 1% dividend payment, because you are still better off than with the market’s return.

Difference Between Value Stocks and Dividend Stocks

Value stocks offer a better return on your investment than the market average. Dividend stocks pay a dividend at some point and are determined by the Board of Directors. That means that the amount of the dividend is also dependent on the earnings of the company.

How to Choose Between Value and Dividend Stocks?

A good way to determine whether you are a value investor or a dividend investor is to simply think about the investment in your portfolio. If you have never traded stocks before, investing in dividend stocks might be a good way to start. 

But if you are someone who actively invests in stocks, looks for bargains, tracks their performance, and talks about them with other people, you are more likely a value investor.

Final Words

Value and dividend stocks each have their own set of benefits. You can successfully take advantage of the benefits of each of these stock types by making an investment in them. 

Having said that, you should first make sure that you have a demat account before moving on with your investment in either of them.

Open a Demat account from TradingBells.