Difference Between Growth Investing And Income Investing

The two main stock-picking strategies are known as Growth Investing and Income Investing. The strategies employed by an investor are tied to his or her overall investment goals.

Before you begin any journey, you must know your intended destination. It is the destination that determines the direction you take, the mode of transportation, and even what you wear. Every single decision is tied to the original goal of getting to destination X.

Where you are not sure where you’re going, all other decisions are futile and would most likely leave you going in circles. This is how the business of investing is. As an investor, the primary thing you need to know is where you are going – your objective – before you can create strategies towards getting there.

While there are different goals for investing, the two major ones include investing to increase the value of your investment or investing to earn consistent income. These are generally known as Growth / Value Investing and Income Investing.

Since your investment is ultimately tied to what is best for you, no one method is better than the other; the goal should be based on your current needs as an investor. After all, there is no point investing for the future if you can’t survive today.

These methods are broadly referred to as stock picking strategies and the reason is simple: before you pick a stock to invest in, you must ensure that it suits your investment goal.

Growth Investing

Growth or value investing is an investment strategy that is geared towards the appreciation or growth of an investor’s capital. As such, the investor is interested in those stocks that are expected to grow in value an above-average rate compared to its industry or the market itself.

These companies have the potential for higher revenue and growth and can potentially grow their earnings faster than the average company or stock. They might not pay dividends often enough or even at all as they would most likely plough in their earnings to further grow the market and deepen its market share.

As such, only the investor who is willing to wait for his investment value to multiply, can invest in growth stocks.

Income Investing

Income investing on the other hand, is for the investor who wants his money to work for him periodically. It covers investments that can generate cash income either as interest, dividends, or capital gains.

In the context of stock investment, it involves choosing stocks or securities that do not just pay dividends, but pay dividends that are above average in the stock market. If your goal is income investment, your goal is to find those companies that pay the highest dividends in the market.

These companies have steady but slow growth. As a result of the slow growth involved, they compensate their investors by paying steady dividends. At the end of the day, they have less to reinvest into the growth of the company.

Determining which works for you depends on a number of factors ranging from risk, lifestyle, age, and so on.

For example, there is an assumption that young, upwardly mobile individuals should put more money in growth stocks that have more risk, while having higher potential than other investments and those who are older or closer to retirement should take a more conservative approach to investing.

In our next post, we would highlight factors to consider before choosing between growth or income investments.

Written by Lawretta Egba.