The 3 Investing Styles

Growth Investing

Growth investing is the most straightforward and popular form of investing. Generally it can be broken down into 4 categories; picking and hold growth stocks, value investing, indexing investing and speculative penny stock investing. The overarching strategy to growth investing is the classic by low and sell high mantra. Since we are talking investing and not trading this is simplified by holding your picks for long periods of time for maximum growth. The vast majority if not all of your profits will come from selling the security.

Traditional Growth Investing

Is investing in companies that have massive growth potential, meaning rapid price appreciation. A few examples of this recently has been Palantir (PLTR) and NVIDIA (NVDA) especially a year or so ago before its mind blowing 800% gain. Overtime growth investing is expected to outperform the overall market. They are definitely not without risk however they are generally less risky then our next sub-type.

Penny Stock Investing

Penny stock investing is the most speculative form of Growth Investing. It is generally used for attempting to make quick profits over the short term. As the name implies they are typically trading for under a dollar per share. They can be found on your standard exchange but more often than not you can find them on an emerging exchange. In Canada the Toronto Stock Exchange is the senior equity market and the TSX Venture Exchange is the public market for emerging companies where penny stocks are easily found. An example of this that I have bought in the past is Aduro Clean Technologies (ACT). However, I bought a fairly small amount and sold for only a 40% gain. If I held over the past 4 years I would have gained 300%. (Hinds sight is 20:20 and all that)

Value Investing

Involves buying undervalued assets with strong fundamentals, such as older companies that are trading below their intrinsic value. Value investors look for companies where the stock price doesn’t reflect the company’s true worth, and they hope to profit when the stock price increases. This is sometimes referred to as blue chip investing, however, depending on other factors blue chip investing can sometimes refer to dividend investing.

Index Investing

Last but certainly not least we have index investing. The major difference between this sub type of growth investing and the other 3 is that index investing does not involve picking stocks. This is the most passive form of growth investing and by far the least amount of maintenance. The idea here is that markets are generally quite efficient and leave little room to make excess profits by investing since everything is already fair and accurately priced. In recent years even the legendary investor Warren Buffet has claimed difficulty in outperforming the S&P 500 at his company Berkshire Hathaway.

Depending on what you are looking for some examples are VTI and VOO on the American side and for us Canadians a couple of solid options are XAW, ZCN or even the Canadian hedges S&P 500 etf in VFV.

Dividend Growth Investing

Dividend growth investing is not for those that are looking to make quick profits. It involves buying stocks that have the potential for growth through two means, first through stock price appreciation and second their dividends, which is what we will focus on. The cornerstone is choosing companies that are stable and consistently increasing dividends. By doing this you can compound the dividends into more and more shares especially as the dividend payout percentage increases. The ideal scenario with this strategy is to get to a place where your dividends cover your expenses and since you have picked companies that continuously increase their dividends you won’t have to worry about inflation.

There are a few terms that you will here thrown around in this space:

• Dividend Yield
  • Annual Divided / Current stock price
    • Ex: $1 / $25 is 4%
• Dividend Growth Rate
  • (Dividend Current / Past Dividend - 1) / # years between
    • Ex: Looking at TD’s last dividend vs 5 years ago (1.02 / 0.74 - 1) / 5 = 7.57% growth rate
• Yield on Cost
  • This is like Dividend Yield except you use your book price instead of the current stock price
  • The wildest example I have heard of this is Berkshire Hathaway’s purchase of Coca Cola stock (KO) which they purchased in Q4 of 1998. Their current cost basis is approximately $3.2475 per share and Coca Cola’s current annual dividend is $1.94
    • Using the calculation above this means their yield on cost is around 60%. To emphasize how absurd this is, every 7 quartes KO will have paid Berkshire more in dividends then they initially invested in KO stock.

Index Dividend Growth Investing

A part of dividend growth investing still relies on you picking the right security. Sometimes you buy something that does not work out or sometimes you hold a stock for far too long… cough cough… AQN anyone?

To avoid those mistakes / lower anxiety I bring to you the dividend growth ETFs. If you have been following my stocks I bought series where I reveal my stock portfolio you already have heard of two of them VDY and SCHD. With these types of ETFs you are trading a hopefully low fee for a hands off approach leaving it up to the pros to choose what to buy.

Passive Income Investing (PII)

In some ways passive income investing can be a bit of a misnomer since technically at a certain point Dividend Growth investing is quite passive. To me the main difference is that PII’s main focus is on generating as much yield as possible through dividends / distributions and little to no stock price appreciation. There has been a huge surge in popularity of PII since the pandemic especially in the FIRE community. Mostly due to the fact that it requires the least amount of capital to receive enough distributions to sustains one’s life style. This can be made even lower with some of the high leveraged funds.

You may be thinking "this sounds too good to be true" which in my opinion the jury is still out until we get more history on these funds. The main downside to these funds is twofold. First the high dividends generally come from either writing covered calls or using leverage or even both. This all has a cost associated with it and thus the fees are significantly higher than those seen in index investing. Second due to how these funds are setup,particularly with the use of covered calls, they should under perform the market in the long term. This can be mitigated via the use of leverage.

There are three types of PII investments:

• High Dividend Stocks that have little growth potential
  • Bell Canada (BCE) appears to fit this bill recently with a wil 10.553%
• Split Share Funds or Closed End Funds
  • They use two different securities the class A shares and the preferred shares and in doing so they create their own leverage
    • class A leverages off the safer preferred shares to increase yield
  • The O.G. Close End Fund here in Canada is Canoe (EIT.UN) which I hold in my TFSA
• Covered Call ETFs
  • These come in many forms with the first being launched in Canada by BMO in 2011:
    • Riskier Single Stocks types such as YTSL which only holds Tesla Stock
    • Old faithfuls like ZWB which holds all the major banks in canada with a moderate yield
      • Newer covered call ETF with leverage that I hold is BANK
    • Index Based such as the O.G. QYLD or the newer QQCL
    • All in ones which try to mimic holdings / performance of a particular index
      • The pioneer here is Hamilton ETFs HDIV and HYLD

Phew that was a whirlwind for me but to put it simply there are many options these days for high income securities and not all are made the same. Personally I am sticking to the safer all in ones with some indexed based and some tried and tested split share funds.

What do I do?

Incase you haven’t read my Stocks I Bought Series I tend to dabble in a bit of all of the strategies. My largest holdings are in the tried and true indexed based etfs. This is because I do not believe I can consistently beat the market so I simply dollar cost average.

My second largest holdings are in Indexed Dividend Growth Investing. Particularly I hold SCHD in my RRSP and VDY in both RRSP and TFSA. I also hold XEI in my TFSA which is like VDY however it caps each stock at a maximum of 5% of its holdings.

Thirdly is in PII spread out through all of the subcategories except the single stock covered call ETFs as I believe they are far too risky. Do I wish I would have bought the NVIDIA one (which shares the ticker symbol NVDA) sure but then I would rather just say I wish that I bought NVIDIA itself.

Finally I still have a handful of Individual Stocks, most of which I would like to exit to simplify my portfolio.

Thank you for reading and I hope you enjoyed my rundown of the 3 investing styles. If you would like to support me the easiest way is to subscribe over on my youtube channel or simply return here every Monday for my next blog post.

I hope you all have a great week!