Key Differences Between Growth And Income Investing Explained
Today, we are going to dive into income vs. growth investing. So you can make an informed decision. On which of these investment strategies is right for you.
Either approach can be effective for generating good investment returns. But, picking the right strategy depends on your objectives.
Also, I will share with you a hybrid of these 2 strategies. That brings together the best aspects of income vs. growth styles.
No need to delay. Because our topic, growth vs. income investing awaits us. Let’s go…
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
Income vs. Growth Investing: Key Takeaways
1. First of all, income vs. growth investing represents 2 different investment strategies. Furthermore, choosing an investment strategy helps to guide your investment choices to the right assets.
2. Furthermore, the main focus of income investing is to select investments that generate a steady stream of passive investment income. On the other hand, growth investing values investment assets that will appreciate.
3. To decide which investment strategy is right for you. First, you must determine your investment objectives and risk tolerance.
4. Some investors pursue a hybrid approach. Also known as investing for growth and income. Dividend growth stocks are an excellent option when pursuing a hybrid growth vs. income approach.
5. Finally, stocks and ETFs are some of the most popular investments. No matter which strategy you choose. Just be sure to keep your investment costs low.
And trade stocks for free. I use the Webull app to do so. You can learn more about Webull here.
That’s the overview. Now, let’s unpack this summary.
So you will fully understand investing for growth vs. income. And make a smart choice about which one is right for you.
What Is An Investment Strategy?
First of all, investing for income vs. growth are 2 of several different types of investment strategies.
So, what is an investment strategy? It is a defined approach to investing. It helps guide the choices an investor makes for his or her investment portfolio.
Furthermore, every investor should choose an investment strategy. And follow it. Especially when getting your start as an investor.
Because a strategy provides a filter. Through which possible investment choices can be screened.
Finally, without an investment strategy. It is tempting to chase the latest hot investment. Which is usually a formula for bad investment returns.
Next, let’s define each approach to investing for income vs. growth…
What Is Income Investing?
The primary objective of an income investing strategy is to generate a constant stream of income. That income is paid to the investment owner. It is paid in the form of interest, dividends, or rents.
Sometimes this income is referred to as portfolio income. Because it is income produced by a portfolio of income-generating assets.
What Is Growth Investing?
On the other hand, growth investing focuses on capital appreciation. In other words, growing an initial investment to its greatest possible value.
Furthermore, investors that pursue this approach look for investments that show signs of rapid growth. Either through revenues, profits, or capabilities that will possess much higher value in the future.
Unlike value investing, another strategy. Growth investments are sometimes made even if the price appears excessive.
Finally, in certain situations, growth investments also provide income. But, income is not the primary objective. It is merely a side benefit of investing for growth.
How Income Investing Works
First of all, an income investing strategy involves buying income-producing assets. And holding them in an income investing portfolio. To produce investment income each month.
The goal is to generate the highest possible cash flow. That is consistent with the investor’s tolerance for risk.
Once the income is received from each income investment. It is the investor’s right to do with that income as they choose.
The options are pretty simple. Spend it, save it, or reinvest it.
Furthermore, once the income from an investment is received. It can never be taken back from the owner.
Finally, the assets in an income portfolio will fluctuate in value. Hopefully, the values will increase over the long run. But not always. And not for every income-producing asset.
While the income investor wants his or her assets to appreciate. Appreciation is a secondary objective.
Although, an important one. And should not be overlooked when making decisions about income investments.
Finally, with a steady stream of investment income. There is little need to sell assets.
Unless they reach their optimal price. Or, rebalancing the income portfolio is required. For diversification purposes.
How Growth Investing Works
On the other hand, a growth investing strategy involves buying assets that are expected to appreciate. These assets are held in a growth investment portfolio.
The goal is to generate the highest appreciation in value from the initial investment. That is consistent with the investor’s risk tolerance.
Unlike income investing, the growth investor must sell assets. If he or she needs to produce income. For spending needs or reinvestment purposes.
Next up. How do income and growth investments differ? Let’s use some examples to answer this question…
Examples of Income Investments
Here are several examples of income investments. These are the typical types of investments an income investor would buy and hold in an income portfolio.
There are many more, but I just want to cover some of the most popular…
High yield savings accounts. This is a savings product mainly offered by banks.
Your savings are usually guaranteed against the risk of loss. And in return for lending your money. You receive interest income.
Bonds. A bond is a fixed-income investment. Where an investor lends money to an entity. For example, a company, government, or project for a defined period at a fixed rate of interest.
Dividend stocks are part ownership in a company through shares of common stock. Dividend investing vs. growth investing means that the company regularly pays dividends to its stockholders.
Real Estate Investment Trusts (REITs). REITs are another type of dividend-paying stock. Except for this time the company must own, finance, or manage income-creating real estate to qualify.
Exchange-Traded Funds (ETFs). An exchange-traded fund is a collection of securities that tracks an underlying index. In this case, the index will be focused on income-producing securities. For example, dividend stocks or bonds.
Tangible real estate. For income investors, tangible real estate investments typically take the form of rental properties.
If you are interested in learning more about these and other income investments. Be sure to check out my complete guide to income assets for investment.
Examples of Growth Investments
Here are several examples of growth investments. These are the typical types of investments a growth investor would buy and hold in their portfolio.
Once again, there are many more, but I just want to cover some of the most popular…
Most Popular Growth Investments
Growth stocks represent part ownership in a company through shares of common stock. Furthermore, company management chooses to reinvest most if not all profits back into the business.
Rather than pay dividends. This explains one of the main differences between income stocks and growth stocks.
Private businesses. Ownership interest in businesses that are not traded on a public stock exchange. Once again, profits are retained and reinvested back into the business.
Exchange-Traded Funds (ETFs). As we know, an ETF is a collection of securities that tracks an underlying index.
In this case, the ETF index is focused on growth stocks or other types of growth assets. That pays little or no dividends.
Real Estate. For example, undeveloped land that is not currently positioned for rental income. It is a physical asset held for its growth potential.
A single-family residence located in a popular or soon-to-be popular location. And used for living purposes. Not a source of rent. This is another example.
More Speculative Growth Investments
Precious Metals. Gold, silver, and platinum are popular investment metals. They pay no income to the owner.
Currencies. Like other appreciating assets, the value of a currency is influenced by the laws of supply and demand.
Gems, collectibles & luxury items. The list of luxury asset types that fall into this category is limited only by one’s imagination.
But the value is based only on what another party will pay. Classic cars, wine, baseball cards, and gems like a ruby fall into this category of unusual investment assets.
As you read through the possible growth investments listed above. They become more speculative. That means the investment returns may be substantial.
But you need to possess expertise in the area. To manage the risk. And know what you are doing to buy low and sell high.
That’s why most growth investors stick with the most popular types. Specifically growth stocks, private businesses, ETFs, and land. Where good information is available to assess the quality of each investment.
If you are interested in learning more about these and other growth investments. Be sure to check out my complete guide to appreciating assets.
So, now you know about income vs. growth investing. And examples of income investments vs. growth investments.
But, which strategy should you choose? Let’s talk about that next…
Is Income Or Growth Investing Right For You?
As I said earlier, every investor should have a strategy. To evaluate investment options. Executed properly, either of these investment strategies can meet your investment goals.
To choose a strategy, you need to first take a step back. And determine your investment objectives. Ask yourself what you want your investments to do for you.
Here are a few things to consider when determining your investment objectives.
If you have:
- The desire for passive income through investing
- Lower tolerance for risk of loss
- No issues paying taxes on the income received
Then, income investing is probably the best choice.
And, one point on taxes. Hold your income investments in an IRA. And the taxes can be deferred or eliminated. Depending on the type of IRA account you open.
Have you been thinking about starting an IRA? To provide for a secure financial future. Then M1 Finance is a great place to do so. You can learn more about M1 Finance here.
On the other hand, if your investment objectives include:
- The desire for appreciation in the value of your portfolio holdings
- Having a higher tolerance for risk of loss
- Not caring to receive income from investments
Then growth investing might be the best choice.
But this does not have to be an “either, or” decision. Let’s discuss…
How To Have The Best Of Both Income and Growth Investing Strategies
Many investors choose to pursue a hybrid investment strategy. That balances the income vs. growth investing tradeoffs.
Sometimes this strategy is referred to as investing for growth and income. A subset of this approach is called equity income investing.
Equity income just means investing only in stocks that pay dividends. Where you choose income vs. growth stocks. Also known as income stock investing.
To summarize, the investor chooses some growth investments and some income investments. To benefit from receiving income today. While patiently waiting for growth investments to increase in value over the long-term.
I pursue this option in my investment accounts. Specifically, an equity-income investing approach.
And dividend growth stock investing is the perfect investment strategy to achieve the investment objectives below…
If you desire:
- To have a current income now
- A growing income from future dividend increases
- Asset appreciation from rising stock prices
Then your investment objectives are similar to mine. Therefore, I allocate a large portion of my investment portfolio to a dividend growth investing strategy.
Are you interested in finding good dividend growth stocks? I use the Simply Investing Report.
It is full of dividend stock recommendations. And, concise analysis to support those recommendations. You can learn more about Simply Investing here.
Finally, there are many income and growth funds and ETFs. That pursue this hybrid investment strategy.
So, you can implement either strategy. With a small group of ETFs or mutual funds.
Income Vs. Growth Investing: Wrap Up
First of all, an investment strategy is a defined approach to investing. It guides the choices an investor makes for his or her investment portfolio.
Furthermore, determine your risk tolerance and investment objectives before choosing an investment strategy. Furthermore, income or growth investing are just 2 of many approaches an investor can choose from.
Finally, regardless of which direction you take. Make sure to be smart and manage your entire financial picture.
I use Personal Capital to pull all of my spending and investments together in one place. Best of all Personal Capital is free to sign up and use. You can learn more about Personal Capital here.
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