In a recent poll of
- A sure win of $200
- 60% of win of triple of $200 and 30% of a loss of double of $200
There were altogether 58 respondents to this poll, of which 37 (representing 63.8%) chose A and 21 chose option B (representing 36.2%).
Mathematically, it is not difficult to calculate that the expectation of option B is higher at $240. Certainly, many of those who polled know the mathematics behind this, but yet the polls showed that almost two-third of them chose Option A, that is, to put the money in the pocket than rather than chasing a possibility of higher return. After all, as the proverb goes, a bird in the hand is worth two in the bush, right? So, what can we conclude from here?
One conclusion that we can draw from this is that despite the uncertainties of stock investing, we being human being beings, tend to look for certainties within this environment of uncertainties. That’s why investors tend to look for stocks that pay dividend than those that do not. This also means people tend to buy dividend stocks (or high yield stocks) than going for growth stocks (that pay little or no dividends). That could possibly be the reason why there are so much attention on REITs, despite that price change in REIT is not exactly significant over time. In fact, this Covid-19 pandemic, surfaced this. When people realized that their future distribution per unit (DPU) is at risks, everybody rushed out of the exit door resulting in a stampede. Those REITs that tanked 15%-20% were considered to be the better performing ones as some of them dropped as much as 40%-50%.
Even that, Singapore, by itself, is not exactly a good sample to compare growth stocks and dividend stocks because the number of true growth stocks are few and far in between. But over in the US, some growth stocks indeed can outgrow dividend stocks. Just look at companies like Microsoft. Its dividend was $2.04 per year as of FY 2019. The dividend yield based on today share price is merely 1.05%. In FY 2018, the dividend yield was hardly 1.5%, but yet its stock price ran up more than 50% in the last two years from $120 per share to almost $200 now.
Extending this finding further, it is not difficult to see why the penetration rate of Singaporeans investing in stocks is only 8% (can’t remember the source of this statistics). It means that despite knowing that stocks offer better returns in the long run compare to bank deposits and insurance, still people choose to put most of their money in the bank as deposits or buy insurance.
Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.