Table: Income vs. Growth Stocks? It's Closer Than You Think
As long as you reinvest the dividends, income stocks can deliver returns competitive with growth stocks. The following example compares what you'd get by investing $10,000 in a high-dividend stock, the banking giant J.P. Morgan Chase, and Tyco International, a growth-oriented conglomerate with only a token dividend. We used the company's current dividend to estimate the divi- dend yield for the first year and historical dividend payout trends to esti- mate how fast their dividends will grow. For stock price appreciation, we assumed stock prices would grow at two-thirds of the Wall Street analysts' five-year estimated earnings growth rate.
J.P. MORGAN CHASE* YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
VALUE OF STOCK REINVESTING DIVIDEND $10,000 $11,189 $12,575 $14,134 $15,886
(VALUE OF DIVIDEND BEFORE REINVESTING) 360 455 512 575 646
TYCO INTERNATIONAL** YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
VALUE OF STOCK REINVESTING DIVIDEND 10,000 11,200 12,544 14,049 15,735
(VALUE OF DIVIDEND BEFORE REINVESTING) 5 6 6 7 8
By the fifth year, the total value of the J.P. Morgan Chase investment would exceed that in Tyco International.
* 3.6% current dividend yield; 13.0% annual dividend growth; 8.0% annual capital appreciation ** 0.05% current dividend yield; 0% annual dividend growth; 12% annual capital appreciation
Data: BusinessWeek, Thomson Financial/First Call