Chapter 11. The Case for Growth

Elliott H. Gue

Many investors assume that stocks paying dividends are inherently safer investments than growth-oriented names that offer no yield. The logic goes that companies with dividends offer steady income while gains from growth stocks are ephemeral, based solely on ever-shifting expectations of future earnings prospects and economic conditions.

Investing for growth and capital gains is all too often associated with painful memories of the technology bubble in the late 1990s, during which investors shunned value and dividend-paying stocks, bidding up valuations on growth-oriented names to unprecedented levels. After all, those who drank the New Economy Kool-Aid projected that the Internet would offer companies limitless growth opportunities.

Some concluded that dividends were totally anachronistic; companies should reinvest their cash to grow the business further. The folly of that growth-at-any-price mantra became all too apparent after the 2000 tech wreck.

But, the easy money policies of the Federal Reserve after 2001 helped to inflate an income stock bubble that was every bit as pernicious as the tech boom and bust that preceded it. As Figure 11.1 shows, amid a series of rate cuts the U.S. national average yield on a 1-year certificate of deposit (CD) collapsed from more than 6 percent at the beginning of the decade to less than 2 percent, an insufficient payout for most investors looking for regular income from their savings.

Figure 11.1. Effect ...

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