Investing for Income or Growth

Investing is all about choice, and making sure that the investments you choose are the right ones to meet your personal objectives. One of the first decisions you’ll make will be deciding whether you are looking to generate an income or if you would prefer to achieve growth.

Growth simply means increasing the value of your investment over time, while income means you’ll receive regular payments coming in. The type of investments you choose depends on whether you require capital growth for the future, income from your investment for now, or a combination of the two.

Investing for Income

Getting an income from your investment is often an important requirement for people who are retired or approaching retirement, those who need to supplement their salary, or those with a relatively short investment timeframe.

The most popular forms of income investment are bonds (which are also known as ‘fixed income’ investments) and cash. Both of which pay a regular, consistent rate of interest either annually, twice a year or four times a year. You can also obtain an income from shares in the form of dividends, and many equity funds are set up solely with the aim of generating a stable income.

Income stocks are most usually found in solid industries with established companies that generate good cash flow. They have little need to reinvest their profits to help grow the business or fund research and development of new products, and are therefore able to pay sizeable dividends back to their investors. Examples of traditional income-generating companies would include utilities such as oil and gas, telephone companies, banks and insurance companies.

Investing for Growth

An investment grows in value when its price increases, and you can sell it for more than you paid for it. The difference between the price you paid and the price you sell for is known as your capital gain.

Growth investments usually suit people who are willing to keep their money tied up for five years or more. The longer you leave your money invested, the greater the likelihood that you’ll get a significant capital gain when you decide to sell.

Investors looking to see their assets grow over time should think about investing in the stock market, which is generally considered to be the best home for a long-term investment.

Most growth stocks do not pay a dividend, instead preferring to plough the money back into the business to fund expansion, or product development. While growth stocks can be volatile in the short-term, they can generate far greater returns over the long-term than income-focused investments.

Growth stocks are less stable than their income counterparts, because there is no guarantee that their value will continue to rise. Many areas of growth tend to be subject to changes in investor sentiment – the technology sector being the most prominent example of a growth sector that rose dramatically in value before falling back down to earth with a bump. If you decide to invest for growth you need to make sure that you are aware of the possibility that you may lose your investment if things don’t go to plan.

Should you Choose Income or Growth?

How can you decide between growth and income investments? It all depends on your investment time frame, and what you need the investment to provide for you. If you need a regular stream of income, you should focus your portfolio on assets that will help you achieve this, such as cash and bonds that will provide a fixed income. If you have a longer investment time period, or you do not need an immediate income, you should think about a larger allocation to growth-focused investors.

Whatever your preference, if you hold a variety of investments, both growth and income, you should be better prepared for whatever economic ups and downs might be ahead of you. As your financial situation changes over time, you should be prepared to make the necessary adjustments to your investment portfolio, and switch from growth assets to income as your investment needs change.