Whenever the topic of investing is brought up, most people tend to classify themselves into two distinct camps.
The first is growth investors who park their money in growth stocks to enjoy capital appreciation.
The second are income investors who invest solely to enjoy a steady stream of dividends.
But what exactly is the difference between these two schools of investing?
And if you are just starting, which type of investing style should you pursue?
The gaudy allure of growth stocks
Growth stocks, as their name implies, refer to companies that exhibit rapid growth in both revenue and profits.
Such businesses typically do not pay a dividend or may pay a very small dividend, as they need to reinvest the bulk of their profits to grow the business.
As a result, investors who own such stocks typically look for capital appreciation in the form of a higher share price.
Some examples of growth stocks include those in the US market such as Alphabet (NASDAQ: GOOGL), Meta Platforms (NASDAQ: META), Crowdstrike (NASDAQ: CRWD) and Snowflake (NYSE: SNOW).
Stocks like these usually sport double or even triple-digit revenue growth rates and are also growing either their customer base, subscription revenue, or profits at a decent clip.
By owning such stocks, investors can multiply the value of their investment portfolio and grow their pot of retirement money.
However, growth stocks also tend to be riskier as their share prices incorporate growth expectations.
The failure to grow as fast as projected may lead to sharp swings in share price.
Hence, growth stocks may not be for the faint of heart as you will need to tolerate significant market volatility.
Younger investors who have a long investment time frame and risk tolerance may find growth stocks attractive.
The resilience of dividend stocks
On the other end of the scale are dividend-paying stocks, also known as income stocks.
Such stocks normally consist of mature businesses with a significant market share that experience slower growth rates.
They generate copious amounts of free cash flow that exceeds what they require for reinvestment.
Therefore, the business can afford to pay out some of this cash as a regular dividend.
Some examples of US dividend stocks include Proctor & Gamble (NYSE: PG), Kimberly-Clark (NYSE: KMB), and Clorox (NYSE: CLX).
Such businesses are usually more resilient to downturns as they have sturdy balance sheets and strong cash-generation capabilities.
Then there are also REITs or real estate investment trusts.
REITs are bundles of real estate packaged into a portfolio and managed professionally.
They are required to pay out at least 90% of their profits as distributions to qualify for tax exemptions.
Because of this attribute, REITs make great income stocks as they pay distributions either quarterly or half-yearly.
Some examples of popular REITs include CapitaLand Integrated Commercial Trust (SGX: C38U), Mapletree Logistics Trust (SGX: M44U), and Frasers Centrepoint Trust (SGX: J69U).
Gunning for the best of both worlds
The thing is – why should you have to settle for either growth or income stocks?
With a plethora of choices out there, it is easy to construct a portfolio that includes both types.
What’s more, there are stocks out there that also give you the best of both worlds – decent levels of growth along with some dividends.
Look at Nvidia (NASDAQ: NVDA), one of the hottest artificial intelligence stocks right now.
As of the date of writing, shares of the graphics processing unit (GPU) manufacturer have soared 81.7% year to date.
Its fiscal 2024 results saw net profit leap 581% year on year to US$29.8 billion.
But Nvidia also pays out a quarterly dividend of US$0.04.
Or let us turn to iFAST Corporation Limited (SGX: AIY), a financial technology company operating a platform for the buying and selling of unit trusts, stocks, and bonds.
The group reported a 340% year-on-year surge in net profit to S$28.3 million and also paid out a total dividend of S$0.048 for 2023.
Get Smart: Have a mix of both
The verdict is in.
Both growth and income stocks have their place within an investor’s portfolio.
It depends on your personal goals and what you are looking for in an investment portfolio.
If you prefer capital gains, then you should include more growth stocks.
But if you enjoy receiving a flow of passive income into your bank account, then income stocks are more suitable for you.
Or if you are like me, who desires the best of both worlds, you can choose stocks that offer such attributes.
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Disclosure: Royston Yang owns shares of Alphabet, Meta Platforms and iFAST Corporation.
