Falling into the growth trap

The more I read books advising investors to do the opposite, the more I think that what Dr. Jeremy Siegel described in THE FUTURE FOR INVESTORS as The Growth Trap. That is, because of the promise of greater growth, investors overpay, and therefore getting lesser returns than investors who put their money in relatively cheaper investments. And this is true even if the growth story holds up (which of course it often doesn't, especially in the long run). And this is especially true of investors who are reinvesting dividends along the way, because each time they buy new shares of stock with their dividends, they are getting fewer shares of the growth stock than investors do of the nongrowth stock.

So over time, investors in the more boring stock acquire more and more shares of it, and therefore in the long run are paid more and more in dividends.

This finding is being generally overlooked, since it's counter-intuitive and certainly unsexy. And also goes against the advice of numerous books on investing.

I'm reading a book on REITs and the author writes about how there's a trade-off between REITs that pay higher dividends now and those that retain more of their earnings for future growth. That future growth may or may not come to pass, and REITs should retain enough cash to stay in business, but generally it's therefore better to go with REITs that pay the higher dividends now (as long as they're paying it out of current earnings. If they're dipping into saved cash that's a bad sign.)


Growth Trap
Growth Trap