Like there are different investors with different risk tolerances, there are different schools of thought on investing. In this article, we;’re looking at income vs growth investing.
Income investing tends to get a bad rap because it’s boring and for ‘old people.’ However, income investing is now more popular due to the passive income and stability it provides.
Growth investing isn’t focused on passive income or avoiding risk. Instead, the growth investment strategy seeks capital appreciation through growth in the value of the stock portfolio.
Which should be your investment strategy – income or growth?
That depends on your investment goals and financial needs, as well as on your tolerance for risk.
Here we’ll look at income investing and growth investing, their risks, and their benefits.
You may find that balanced investing, a blend of income and growth investment strategies, will provide you with the best of both investment worlds and allows you to build a solid portfolio for growth and income.
Why Do People Invest?
The goal of investing is purchasing assets that increase in value over time.
That definition from Forbes magazine casts income vs. growth investing as two different paths to reach the same destination of making money.
This is why people invest – to use the money they have to produce more money.
With historically low-interest rates, the days of putting money aside in a savings account and hoping to see it grow are over.
The little interest for savings accounts and even certificates of deposit won’t keep up with inflation, let alone provide savers with a sum that will allow for retirement, travel, or other long-term goals.
The need to have money grow over time has sparked investments from a growing number of Americans.
In addition, investing has become more accessible and less expensive since the advent of online trading platforms such as Robinhood and SoFi.
Investing is now as close as the smartphone in your pocket, and gone are trading fees, which, until recent years, were charged every time stock was purchased or sold.
This opened investing to a larger audience, including smaller, first-time investors.
What Is Income Investing?
As its name implies, an income investing strategy builds a portfolio of stocks that provide passive income through dividends.
Usually, this portfolio grows in book value over time, but the dividend yield is of more importance for the serious income investor.
Dividends are paid to shareholders by some companies as a percentage of profits per share of stock owned.
Companies do not have to pay dividends, but many do so because it shows investors how profitable and financially sound their companies are.
Companies that choose to pay dividends to their shareholders tend to be stable, well-established, and less risky.
Real estate investment trusts, or REITs, also are known for high dividend yields.
More conservative are bond investments, but these also provide dividends and can be well-suited for investors with a low tolerance for risk.
Newer companies in their growth stage usually do not pay dividends, or if they do, their yield is low.
This is because corporate leaders choose to invest that money back into the company instead.
Investing for income is popular for the idea of having a passive income that rolls in every month.
Dividends can also be reinvested in a stock portfolio to purchase more shares and increase the value of the investing account.
What Is Growth Investing?
Growth investing is the yin to income investing’s yang. Investopedia defines a growth investment strategy as one that seeks a return on investment by the growth of the asset’s value.
Growth investors receive dividends from some of their stocks, but dividend income is not the primary focus of growth investing.
The difference between growth and income stocks can be in the companies’ age, and how well established they are.
Growth investors tend to have a higher tolerance for risk since they often purchase shares of younger companies, hoping to see growth in the value of shares owned over time.
Picking the right company can deliver astronomical growth.
For example, an investor who bought $1,000 in shares of Amazon at its IPO would have more than $1.3 million today.
Of course, a growth investor must pick the right company at the right time.
They also tend to be more trader than investor.
For income investors, choosing the best investments can be easier since they tend to focus on the dividend yield and judge future yields by past performance.
Growth investing can espouse a buy-and-hold philosophy, in which investors buy shares of a young company and hold them, watching as their investment grows in value.
Income investors also hold their stocks as long as they are providing passive dividend income.
How You Can Best Balance Income and Growth
Maybe the right question isn’t income vs growth investing, but why not both?
Each investor has a unique set of goals and risk tolerance.
By creating an investment portfolio that’s a balance of income and growth strategies, investors can get the high returns that can occur in growth investing with the income and lower risk associated with income investing.
Finding a balance between income investment strategies and growth will create a diversified portfolio of established companies and new ones.
This blend of income and growth stocks will provide a higher return than income investment strategies alone.
Income and growth investing both have their benefits and drawbacks, but the best way to balance the two is by investing for both income and growth.
Investing should rarely be an all-or-nothing proposition.
A diversified portfolio can help investors find the right balance of income and growth.
A young investor may have a portfolio that’s higher in growth investments.
Older investors may want to shift more toward a portfolio high in income stocks, as they may be nearing or in retirement.
As investors mature, they can shift from a higher-risk growth portfolio to one that provides passive income month after month.
Asking the question of income vs. growth stocks ignores the idea of balancing income and growth investments.
Balancing income and growth investment strategies can create a portfolio with a personalized blend of risk and return poised for profits for most investors.
2 thoughts on “Income vs Growth Investing”
You’re so on point and the information you share is so valuable. Thank you
Thanks for teaching us this! Can’t wait to learn more!