Income vs. Growth Investing: Strategies for Your Portfolio

By: Andrew McShane

A Simple Guide to Income vs. Growth Investing

You are about to learn...

  • The Characteristics of a Growth Stock
  • The Different Types of Income and Growth Investments
  • Whether Income vs. Growth Investing is Right for You

Often you hear people talk about income vs. growth investing and it can be quite overwhelming. But the ideas around income vs. growth investing go back many years and there are people that believe strongly on both sides.

There are two ways to make money with any investment. One is through the appreciation of the asset and the second way is through the receipt of a periodic dividend or interest payment from the asset.

Growth assets like non dividend paying stocks rely 100% on the appreciation of the asset to make money. An income investment like a dividend paying stock or bond is usually relying mostly on the receipt of a dividend or interest payment to make money, however there may be the opportunity for some appreciation as well.

What is a Growth Stock and What Should I Look for as a Growth Investor?

A growth stock is any stock that Wall Street investors believe will grow faster than the market averages for an intermediate to long term period of time. That growth will in turn cause the stock price to appreciate.

A stock growth investing strategy might be one that invests in companies with the following characteristics:

  • A large addressable market. If you want a company to grow you need it to be in an industry that has large, and preferably growing, demand for its goods and services. Online retail would be a good example of a large addressable market. A bowling alley supply company would be a poor example.
  • Visionary leadership, particularly founder led companies. To complement the large addressable market, you want a visionary leader who can capitalize as needed with appropriate goods and services that the market wants.
  • Winners. You want a company that knows how to win and has won and grown in the past. Sure there are lots of people that make money on turnaround situations, but the best way to build real wealth in the long run is to invest in companies that have demonstrated success in the past (i.e. winners) and hold them for long periods of time while that success continues.

Different Types of Income Investments

An income investment is any investment that pays a periodic income stream, normally monthly or quarterly.

Low risk income investments would be things like bank certificates of deposit or treasury bills/bonds. These types of investment carry very little risk and thus the yields will be low at probably 1%

Medium risk income investments would be high-quality corporate bonds and certain dividend paying income stocks, both with conservative balance sheets. Here you are taking a bit of risk, so you can expect a higher return then the low risk investments, say in the 3% to 5% range.

Higher risk income investments might be directly owning commercial or residential real estate, thus being a landlord as you collect monthly rent checks. With these higher risk assets, since you are assuming a decent amount of risk to your principal so you should be rewarded with annual returns of 10%+.

Examples of Growth Stock Investments

Remember when we talked above about the three characteristics to look for in a growth stock, they were:

  • Large addressable market
  • Visionary leadership and
  • A track record of winning

When I think of these three characteristics above, I think of companies like Amazon, Adobe, Microsoft, Costco and Facebook that you can invest in via the stock market.

Each of these companies are tackling huge and growing opportunities in the areas where they compete.

They have visionary leaders that seem to be able to peer around corners and react to changes in the marketplace in a timely fashion.

And they have a long track record of winning. This does not assure they will win in the future but would seem to give them a better chance for sure

Is Growth or Income Investing Right for You

There are no hard rules about which type of investing is right for you.

The two biggest variables would be your age and your risk tolerance.

The younger you are during your working years, you have less of a need for investment income and probably lean towards growth stocks. As you start to reach your 40s and beyond you likely want to start amassing some income investments to take the place of your wages when you reach your retirement years.

In Summary  

You can build real wealth over the long term through either growth or income investing.

Start by investing small amounts of money in a variety of high-quality companies and add to them over time.

You should be happy with the results.

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