So, you have made an important decision to put some of your money into stocks.
The investment landscape is diverse but can be broadly split into two main categories: growth and income.
The purpose of this guide is to explain the difference and to offer examples of each category of investing.
But before we get to that, it’s important to revisit your investment goals and targets.
Assessing your goals
In our beginner’s guide, we asked you to think about what you want to achieve through investing.
It could be a specific dollar value that you wish to set aside for your retirement.
Or a steady stream of income of say, S$1,000 per month that you desire to enjoy in your golden years.
Younger investors can also plan for shorter-term goals such as saving up a certain amount for a life event such as the down payment for their first home or the deposit for a wedding.
The important thing here is to know what your goal is so that you can plan on how to achieve it, whether it be through growth or income investing.
With that in mind, let’s jump right into the definitions.
Growth investing defined
Growth investing, as the name implies, focuses mainly on the growth of the underlying businesses within your investment portfolio.
The main thrust of this style of investing is the increase in revenue, net profit and cash flows of the underlying companies.
As these financial metrics improve, the company also becomes more valuable, thus garnering a higher share price.
As famous investor Warren Buffett says, when the business does well, the stock price naturally follows.
Growth investors are mainly targeting capital gains, defined as the increase in the value of their investment through share price appreciation.
So, if you intend for your pot of money to grow at a certain rate every year, growth investing may be the style that’s suitable for you.
Income investing defined
Income investing, on the other hand, emphasizes passive income received from your investments.
The main focus for income investors is that their investments pay a dividend.
This dividend represents a form of passive income that adds to your regular working salary or helps to pay for daily expenses.
If you are targeting a specific amount of cash inflow for daily expenses, then income investing is the way to go.
Growth + income: The best of both worlds
You might be wondering to yourself: why can’t I enjoy both growth and dividends?
Isn’t this combination the best of both worlds?
In reality, growth stocks usually do not pay a dividend, or perhaps just minimal dividends.
This is because the companies are reinvesting all their profits into growing the business further.
Income stocks pay out a good dividend yield because they have excess cash.
Excess cash is usually also a symptom of poor growth prospects, hence management has no avenue to deploy the cash for higher profits.
Hence, income stocks usually have little to no growth but can afford to pay out a consistent dividend.
To be fair, some stocks do fit the mould of both growth and income.
But investors need to know that there is always a trade-off.
For stocks that purport to provide both growth and income, there will be less of each attribute compared to pure growth, or pure income stocks.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
