Most people invest to try and grow their wealth. But there are lots of different strategies that can be used attempting to achieve that goal. For example, I own some income shares with big dividend yields that I think could pile up over the years.
Some investors do not think much about dividends and instead try to find businesses they think have exciting growth prospects. Could owning such growth shares help increase my wealth?
The case for growth shares
I do think the right growth shares can offer me returns I am unlikely to get from dividend shares. Many businesses that pay out substantial dividends have limited opportunities to reinvest profits in the business, which is why they are paid out to shareholders instead.
Consider Legal & General as an example. I think the financial services company could be a good income investment for my portfolio and I am attracted by its 7.2% dividend yield. But its share price has only moved 4% in the past year – and that was downwards. In fact, Legal & General shares today are within 2% of their price five years ago.
That does not mean it would be a bad share for me to own. But, as is common in mature industries, it is a share where my expectations would focus more on dividend potential than strong growth prospects.
By contrast, some well-known growth shares have done very well in the past five years. Google parent Alphabet is up 150% in that period, for example, even though the past year has seen its share price fall 19%.
Finding growth shares to buy
Put like that, the case for growth shares sounds strong. Even with Legal & General’s high yield, the total return it would have offered me over the past five years is nowhere near that of some growth shares such as Alphabet.
However, that statement is made with the benefit of hindsight. When it comes to well-established dividend shares, a long track record can often give some indication of what to expect next.
Dividends are never guaranteed, admittedly. But I think a business that has proven its model and ability to generate profits is different to one that is still making losses. Such a firm may need to raise new funds even to reach the stage where it proves its business model.
So some growth shares could definitely help me double my money in five years, just like Alphabet would have done recently. But many would have lost me money, as their growth stories did not pan out. How can I try to find the right ones to buy for my portfolio?
A proven business, not just an idea
There is no hard and fast rule. But, personally, I usually try to buy growth shares where the company has already proven its business model can be profitable.
Five years ago, for example, Google and YouTube were already helping Alphabet generate huge profits. Its business had plenty of room to grow, but it was already well on the way.
In other words, if I had bought Alphabet five years ago, I would have been investing in an already successful business, not just an idea. I find that a helpful filter to bear in mind when hunting for growth shares I could add to my portfolio.
