How do you determine when you should choose growth or income stocks? According to conventional “growth vs. income” investing advice:
- if you are a young, upwardly mobile millennial,
- you should put more money in growth stocks that have more risk, but higher potential than other investments
- if you’re closer to retirement,
- you should choose a more conservative investing strategy
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Growth vs income investing
Income investors invest in companies with steady but slow growth. These companies compensate investors for slower growth by paying steady dividends. Instead of reinvesting the company’s profits into research and development, the company distributes them to its investors.
Growth investors look for stocks that can hopefully provide capital appreciation. These companies have the potential for higher revenue and growth, and reinvest their earnings in their business rather than pay dividends.
Which should you own?
Both income and growth stocks can help you meet your financial goals. Depending on where you want to go, one type of investment may be more appropriate than the other. Age and personal income, along with your own tolerance for volatility, are important factors to consider when adding exposure to growth stocks.
When deciding on your asset allocation of growth vs. income investments, don’t ignore the risk-adjusted returns of dividend stocks:
Risk – Dividend stocks historically have lower volatility than growth stocks. They provide a defense in volatile markets and can continue to provide an income stream in market downturns.
Returns – Dividend stocks have historically outperformed growth stocks over the long term (according to JPMorgan Chase), and many investors look for companies that consistently pay appreciating dividends.
By being lured to growth stocks with high short-term returns, investors sometimes lose sight of their main investment goals. Re-orient your investment portfolio by assessing your investing goals and then choosing the appropriate growth vs. income investments.