Our data analysis for the past decade shows that growth stocks have outperformed value stocks. Growth investing has shown a remarkable return rate of 523%, while value investing has yielded 247%.
But will things change in 2024 with the lack of cheap financing and stimulus?
The great debate in stock picking is value vs. growth investing. The terms value and growth represent radically different investing styles and philosophies. The difference in investment styles is best examined by what investors buy. Value investors buy companies, while growth investors buy stocks.
Value vs. Growth Stocks
Growth stocks have beaten value stocks over the last ten years. Our research reveals that value stocks have not performed as well as growth stocks, lagging the S&P 500 index by at least 70%. The value stocks held by Berkshire Hathaway and the Berkshire Hathaway stock value have lagged the S&P 500 by over 100%.
Value vs. Growth Stocks Performance
Our research on Value Stock strategies vs. Growth Stock strategies shows a clear difference over ten years. The S&P 500 has increased a dividend-adjusted 311%, while Berkshire Hathaway has underperformed with a 247% gain, and Berkshire Hathaway’s top 25 holdings have only increased by 204%.
To compare growth stocks’ performance vs. value stocks, we charted the 10-year gains in the following stocks & indices.
- Nasdaq 100 Index +523%: The Ultimate Growth Index
- S&P 500 Index +311%: The 500 Largest Capitalized Companies in the USA
- Berkshire Hathaway (BRKB) +247%
- Berkshire Hathaway’s 25 Largest Holdings +204%: Value Stocks
Value vs. Growth Fund Performance
Our research demonstrates that Growth Stocks on a dividend-adjusted basis have significantly outperformed value stocks. This is also true for value funds, which have significantly lagged behind the Nasdaq 100 by more than 200% over 10 years.
Table 1. Value & Dividend Funds Lag the S&P500 & Nasdaq 100 on a 5 & 10-year basis.
|5-Year Return vs. S&P 500
|10-Year Return vs. S&P 500
|NASDAQ 100 index
|Invesco QQQ Trust
|Vanguard Growth Index Fund ETF Shares
|Vanguard Value Index Fund ETF Shares
|Schwab U.S. Large-Cap Value ETF
|iShares Select Dividend ETF
|iShares Russell Top 200 Value ETF
Warren Buffett on Value & Growth Stocks
Growth investors need to pay attention to Berkshire Hathaway because Buffett is a growth investor, too. “Growth and value investing are joined at the hip,” Buffett once said. Buffett believes a good value stock needs growth.
Buffett seeks growth stocks because growth adds a margin of safety. Without growth, inflation will destroy a company’s cash and assets over time. Buffett thinks no stock can preserve its value without revenue and share value growth.
Buffett shows there need be no conflict between growth and value stocks or dividend and growth stocks. Any investor can be a dividend investor because there are growth and value stocks that pay dividends.
Any investor can be a growth investor because there are growth stocks with value characteristics. Alphabet and Amazon are companies with long histories of growth that have enormous amounts of cash.
Buffett considers cash one of the most important value characteristics. Some people will consider companies such as Meta (FB) and Amazon (AMZN) because of the cash flow.
Buffett shows the line between value and growth stocks is blurred. A growth stock can be a value stock.
Styles of Investing
Growth investing is associated with technology stocks and new industries that grow fast. Growth investors buy tech stocks because they historically grow fast. Many growth investors ignore corporate performance metrics such as revenues, income, cash flow, assets, and gross profit. The growth investors focus on the company’s rate of growth instead.
What is a Growth Stock?
The ultimate objective of growth investing is to sell the stock at a higher price. Growth investors seek the next Amazon (AMZN), Microsoft (MSFT), or Tesla (TSLA), a company with a high share price.
Tesla is a classic growth stock with a high share price, valuation, and a history of not making money.
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What is a Value Stock?
Value investors seek stocks currently undervalued by the market and have the potential to increase in value over the long term.
Value investors look for stocks with low price-to-earnings ratios, solid fundamentals, attractive dividend yields, strong cash flows, and an intrinsic value per share higher than the current stock price.
Dividend vs. Growth Investing
Many people confuse growth investing with dividend investing. Dividend investors seek stocks that pay dividends.
Many dividend investors buy stocks with high revenue and income growth rates because they think those companies will have the money to pay high dividends at some point. Some dividend investors buy companies such as Alphabet (NASDAQ: GOOG) and Amazon (AMZN) because those companies generate enormous cash flows.
Growth investors consider Alphabet, Meta, and Amazon good stocks because of their high revenue growth rates. Value investors love Berkshire Hathaway (BRK.A) because it generates enormous cash flow.
Dividend investors buy stocks only for the dividend, while growth investors buy stocks with the hope of a higher price of selling them for a higher price in the future. Some growth investors will buy dividend stocks to get some money soon.
Classic dividend investors regard dividends as a margin of safety by providing some income. There are also value investors seeking value stocks that pay dividends to generate income.
Berkshire Hathaway CEO Warren Buffett famously hates paying dividends but loves receiving them. Berkshire Hathaway (BRK.B) does not pay dividends, but 36 of the 52 stocks and exchange-traded funds (ETF) Berkshire Hathaway owns pay dividends.
Buffett shows value investors can be dividend investors. Berkshire Hathaway buys value stocks that pay dividends.
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Growth Stock Examples
Growth stocks like Amazon (AMZN) and Microsoft (MSFT) have huge potential to add value through price appreciation. Growth stocks tend to reinvest earnings into the company to expand operations and become more profitable long-term.
Numerous growth stocks are available in the market. Presented here is a collection of both successful and less successful growth stocks, providing insights into their performance and potential.
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Many people think this Chinese electric carmaker could be the new Tesla (TSLA).
NIO, Inc. (China) designs, manufactures and sells electric vehicles. Their product lineup includes the EP9 supercar and ES8 7-seater SUV. NIO offers convenient home charging; power express valet services, public charging access, power mobile charging trucks, and battery swapping.
They also provide services such as battery payment arrangements and vehicle financing.
People needing income from stocks must avoid NIO because they lose money and pay no dividends.
Netflix (NFLX) is a streaming service that offers movies and television series to its members. The company produces its own content, licenses films and TV shows from other studios, and has become increasingly involved in creating original programming. Netflix has quickly risen to become one of the most valuable companies in the world. It has also become one of the most popular stocks for investors looking for growth potential, with its share price rising steadily over the past decade.
The chipmaker NVIDIA (NVDA) is a growth stock with many value-stock characteristics that pay a dividend. NVIDIA’s products are used in gaming, robotics, AI, automotive and healthcare. It has become a leader in the chip market due to its focus on artificial intelligence and high-performance graphics processing units. The company’s stock is up more than 250% over the past five years due to strong earnings growth and broad adoption of its products.
NVIDIA shows that growth stocks can be good overall because of the growth, cash, and dividends.
Zoom Video Communications Inc.
Zoom Video Communications (ZM) is another one of the growth stocks that is becoming a leader in its own right. Zoom provides video conferencing solutions for businesses and educational institutions.
Zoom’s share price grew exponentially due to the COVID pandemic, but since then has faltered. I think Zoom shows one of the great dangers of value investing. The company’s actual value does not justify the incredible share price growth. Zoom’s stock exploded and then collapsed.
Growth vs. Value ETFs and Funds
A growth ETF is an exchange-traded fund built around a portfolio of growth stocks. The thinking behind growth ETFs is that growth stocks offer more security and higher long-term returns than value or dividend funds.
Managers build a value ETF around a portfolio of value stocks. The hope is that the value stocks will be cheaper and pay a higher return than growth stocks.
Many people believe that value ETFs can be safer than growth funds. Because growth stocks are a more speculative investment, some growth investors will contend that growth ETFs are safer because their moneymaking capacity will not shrink in the future.
A common criticism of value stocks is that older industrial stocks serve shrinking markets and have no future. Growth stocks, in contrast, serve a growing market so they could have a better future.
Today’s market offers many growth ETFs. We will examine two of the best-known growth ETFs to show you what to seek in a growth index fund.
Invesco QQQ Trust Series 1 (NASDAQ: QQQ)
The Invesco QQQ is one of the best-known growth ETFs. It includes 100 of the most highly traded nonfinancial stocks on the NASDAQ exchange, such as Apple, Microsoft, and Amazon.
This is an index of the top 100 non-financial shares on America’s NASDAQ stock exchange. The NASDAQ stock exchange is the home of many tech stocks, including Silicon Valley giants such as Apple (AAPL) and Meta (FB). Invesco claims the QQQ is the fifth-largest ETF.
Many people buy the QQQ because it contains some of the biggest tech stocks in America, including NVIDIA (NVDA), Meta (FB), Alphabet (GOOG), Tesla (TSLA), Amazon (AMZN), Microsoft (MSFT), and Apple (AAPL).
Vanguard Growth Index Fund ETF
The Vanguard Growth Index (VUG) tracks the CRSP US Large Cap Growth Index. The Center for Research in Security Prices (CRSP) Large-Cap Growth Index contains many of America’s largest growth stocks. Some of these include tech companies Amazon (AMZN), Alphabet (GOOG), and Apple (AAPL).
Additionally, other large-cap growth stocks included in the index are Walgreens Boots Alliance (WBA), Berkshire Hathaway Inc. Class B (BRK.B), JPMorgan Chase & Co. (JPM), Home Depot Inc. (HD), and UnitedHealth Group Incorporated (UNH).
VUG has a low expense ratio of 0.04%, less than the standard expense ratio for an index fund. The fund pays out dividends quarterly, with a dividend yield of 1.2%. Investing in VUG would expose you to many of the largest growth stocks in America without having to manage each stock. Additionally, you would receive a diversified portfolio with extremely low fees and a modest dividend yield.
Overall, VUG is an excellent choice for investors looking for exposure to the large-cap growth sector of the U.S. market without overexposing themselves to any single company or sector. The fund provides a balanced approach that should
Managers design value exchange-traded funds to lessen the dangers of value stocks through diversification. One purpose of value ETFs is to help investors avoid value traps.
A value trap is a stock with value characteristics that loses money. The best value ETFs limit the value risks by investing in an index of value stocks. Here are two excellent ETFs around to give you an idea of what a good value ETF will look like.
The iShares Select Dividend ETF
The iShares ETF (DVY) Select Dividend ETF offers exposure to the U.S. market’s dividend-paying stocks and has an expense ratio of 0.3%. The Fund includes a portfolio of 100 stocks from various sectors with a 5-year history of consistently paying dividends.
The advantage of the DVY is that it tracks lesser-known value investments many people are unfamiliar with. Another advantage to the DVY is that it combines the attributes of dividend and value stocks.
The DVY’s key holdings include the Altria Group (MO), Prudential Financial (PRU), International Paper (IP), Wells Fargo (WFC), Marathon Petroleum (MPC), Philip Morris International (PM), and ViacomCBS Class B (VIAC). The iShares Select Dividend ETF is excellent because it offers both growth and dividend income.
The Utilities Select Sector SPDR Fund
The Utilities Select Sector SPDR Fund (XLU) tracks an index of American energy utilities. The XLU’s largest holdings include NextEra Energy Inc. (NEE), the Duke Energy Corporation (DUK), and the Southern Company (SO). The Utilities Select Sector SPDR Fund is a good choice for investors seeking a diversified portfolio that offers both capital appreciation and income in a defensive portfolio.
The attraction of the Utilities Select SPDR is that it offers a steady income with limited risks. Many people invest in value ETFs such as the XLU Spider because they invest in industries such as utilities that are not glamorous. The hope is that less glamorous industries will be more stable and less risky. The drawback is limited growth.
In the final analysis, both value and growth investing offer advantages. Value investing offers safety and steady income, while growth investing offers the prospect of more money in the future. Smart investors will understand both strategies and choose the best one for them.
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What is the best platform for value and growth investing?
Our testing shows that Stock Rover is the best overall stock analysis software for investing in value and growth. It provides powerful fundamental data, including detailed financial reports, industry rankings, technical indicators, and research reports.
What are value stocks?
Value stocks are shares from companies considered undervalued compared to their intrinsic value. They often have lower price-to-earnings (P/E) ratios and may pay dividends.
What are growth stocks?
Growth stocks belong to companies expected to grow at an above-average rate compared to other companies in the market. They typically do not pay dividends as they reinvest earnings into further growth.
How do I identify a value stock?
Value stocks are identified through financial analysis, looking at factors like the fair value, intrinsic value, price-to-book (P/B) ratio, debt levels, and dividend yield.
How do I identify a growth stock?
Growth stocks can be identified by their high earnings growth rates, revenue growth, and strong future projections. They usually have high P/E ratios and do not pay dividends.
What is the main difference between value and growth stocks?
The key difference lies in the company's performance and investor's expectations. Value stocks are considered undervalued and have steady earnings, while growth stocks are expected to have above-average earnings growth.
Is it better to invest in value or growth stocks?
Our data shows that over the last 10 years, growth stocks were a better investment, outperforming value and dividend stocks by 200%. However, some studies show value stocks outperformed growth stocks over the previous 25 years.
Can a company be both a value and a growth stock?
Yes, some companies can exhibit characteristics of both. These are often called "blend" or "hybrid" stocks.
Why do growth stocks not pay dividends?
Growth companies often reinvest their earnings back into the business to fuel further growth instead of paying out dividends to shareholders.
Do value stocks always pay dividends?
Not always, but many do. Since value companies are often mature with steady cash flow, they are more likely to distribute a portion of their profits as dividends.
How do market conditions affect value and growth stocks?
Market conditions can greatly impact both types of stocks. In bullish markets, growth stocks often outperform due to investor optimism. In bearish markets, value stocks typically perform better.
Are tech stocks growth or value stocks?
Tech stocks are typically classified as growth stocks due to their high rapid growth and expansion potential.
Can value stocks become growth stocks?
Yes, if a company's earnings start to grow significantly, a value stock can become a growth stock.
Is it risky to invest in growth stocks?
All investments carry risk. Growth stocks can be more volatile, meaning they can have larger price swings, which can be risky.
Do I need a lot of money to invest in value or growth stocks?
No, you can start investing with a small amount. Some brokerages even offer fractional shares, allowing you to buy a portion of a share.