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Why dividend shares are best

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For generations, investors have argued over whether it’s better to go for growth shares or dividend shares.

I might need to put on a tin hat now, and this is very much a personal opinion. But I’m going to say that, with my long-term horizon, dividend shares win hands down for me.

Headlines

It’s growth share stories that people talk most about. “Did you hear about so-and-so? Made a million on the stock market overnight and retired to the Caribbean.

Admittedly, I do know someone who retired on the proceeds of a single well-chosen growth share investment. It wasn’t overnight, mind.

But these are the success stories. We hear about the pennies-to-pounds winners. Folks don’t talk so much about the pounds-to-pennies losers, or the pounds-to-nothing wipeouts. I’ve suffered those.

Wisdom says it’s all about risk and reward. Growth shares are riskier, but the potential rewards are higher. An investor with 10 growth shares can handle a couple of wipeouts if the others come good.

Dividend spread

But I’d rather spread the money across 10 stocks paying good dividends, and which I think have almost no chance of going bust.

As an example, I follow Dividend Heroes, put together by the Association of Investment Companies. It’s a list of all those investment firms that have raised their dividends for at least 20 years in a row.

Several of them, including City of London Investment Trust, have managed it for 55 years. City of London is paying dividends of around 5%. And I think its track record has to make it one of the safest stocks out there.

With, maybe, 3% in share price appreciation, I think I have a realistic (if not guaranteed) chance of achieving 8% per year. Ker-ching, I just got a dividend.

Tenbaggers

But,” a growth seeker might retort, “you’ll never get a tenbagger that way.”

That’s the golden target for many investors, picking a share that returns 10 times its purchase price. Find a few of them, the idea goes, and they’ll more than make up for any losses.

I have two answers to that. One is that we don’t need massive killer investments to create long-term wealth. No, we just need a steady annual return, which we can reinvest. And then the magic of compounding can do the rest.

And dividend investors like me, well, we can get our tenbaggers. We just take a bit longer. Look at my investment trust returning a total of 8% per year. Every £1,000 invested in that would grow into £10,000 in 30 years.

Lower costs

I also pay less in fees over the years. Growth investors are typically swapping into and out of each new prospect as it comes along. I just pay once, and forget about it. Ker-ching, another dividend just dropped in.

This is my personal strategy. Everyone has to choose their own, and growth shares can generate bags of cash too. And, of course, dividends aren’t guaranteed and can be cut. I’ve suffered that too.

Whichever choice an individual investor makes, I think there’s one key piece of wisdom that underlies them all. Choose an investment strategy, then stick to it, for decades. Ker-ching.

The post Why dividend shares are best appeared first on The Motley Fool UK.

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Alan Oscroft has positions in City of London Inv Trust. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.