Investors looking to fund their living expenses through their share portfolio typically select stocks which are high yielding to provide them with income. However, what we have identified over the years is that high yielding stocks have not perform well in the stock market and therefore have not created significant capital appreciation for their investors. Companies which typically pay large dividends are usually blue-chip mature companies. As the growth phases of these companies are over, they do not need the cash to fund expansions or acquisitions and hence pay the funds in the form of dividends to investors. But what yield hungry investors are forgoing is the capital appreciation of growth stocks which can surpass the yield these income stocks promise to pay.

Let’s use some examples and analyse the total return between income and growth stocks. AGL energy (ASX:AGL) is a favourite for income seeking investors as they have historically had high dividend yield. However, the stock price performance has not been doing well for the last five years as we can see share price has dropped 43% over the last five years. If we bought $10,000 worth of AGL (ASX:AGL), we would have been paid $1.373.52 of dividends over the last five years. However, the share price of AGL has fallen the capital of $10,000 would have eroded to only $5,715.24 as of 01/7/2025. The total return on the initial investment of $9,998.76 is only $7,088.76 so although investors have consistently been receiving dividends, they would have lost out in the drop in capital.

Another high yielding dividend stock is Spark New Zealand (ASX:SPK). Spark New Zealand has consistently been paying dividends over the years but the share price been declining in the last five years. If an investor purchased $10K of Spark New Zealand (ASX:SPK) five years ago, they would have received $1,373.52 in dividends. However, the market value of their original investment of $10K would only be worth $5,453.76. The total return of the investment would be worth $8,303.48 which is still less than the original capital of $10K.

Growth stocks on the other hand have increased their dividend over the five years and the share price has also been appreciating. Hence income investors can benefit from growth stocks by the increase in dividend yield along with capital appreciation. If we use the example of Aristocrat Leisure(ASX:ALL) which is a growth stock, the company increased their dividend payout through the years. If we invested $10K of ALL back on 1/7/2020, we would have been paid $1,138.66 in dividends but our investment of $10K would have a market value of $25,873.98 as of 1/7/2025 giving us a total capital return of $27,012.64.

Another growth stock which has performed well is Pro Medicus (ASX:PME). If we invested in Pro Medicus (ASX:PME) on the 1/07/2020 we would only have received $517.50 in dividends but the shares would have market value as of 1/7/2025 of the $105,630.00, giving a total return of $106,147.50.

As you can see income investors looking at income stock are forgoing capital gains for higher yield but over time growth stocks can increase their dividend yield but investors can receive capital gains on top of it too.

Lauren Hua is a private client adviser at Fairmont Equities.

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