Should I Invest for Growth or Income?
One of the common questions that plays in the minds of most investors is the purpose of investing - should an investor invest for growth or income? Before deciding on which of the two is best suited for an investor, we, first and foremost need to understand the differences between an income stock and a growth stock.
What are Income Stocks?
An income stock is basically a stock that pays dividend. The main purpose of owning an income stock is to earn a high dividend consistently as a source of current return, and not to hope for spectacular price appreciation in the stock. The price of income stocks tend to be less volatile compared to other stocks available in the market. As such, during a market down turn, these stocks would show slower decline in price as the investors would be holding on to the stocks for as long as the companies continue to pay the dividend. You can find these stocks in industries that are less affected by the business cycle, where the products or services generated by the companies in the industry are required regardless of the stages of economy we are in. These would include utilities, food and daily essential items. It also means that the stocks of companies providing these products or services bear relatively lower risks.
However, you need to watch out for the interest and inflation rates when investing in these stocks. They are sensitive to the increases in these rates. When the interest rate increase and if the dividend yield of a particular income stock remains the same, or worse still, lower than the interest being paid by other investment options (such as corporate bond or bank’s fixed deposit), the price of this stock may go down. In addition to this, in a situation where the inflation rate rises and if the stocks are maintaining the same dividend rate year after year, in real terms the dividend will become lower.
What about Growth Stocks?
In contrast to an income stock, a growth stock usually pays little or no dividend; instead, it exhibits high growth potential. A typical growth stock will have a higher than industry-average growth rate (usually double digit growth), for more than three years consecutively. You will find that most good growth companies are in the industries that are currently fast expanding, such as Information Technology or Biotechnology. These companies would typically be the market leaders or have the potential of becoming one. One of the notable characteristics of these companies is their research and development expenses, are usually very high as compared to their revenue. In addition, companies that have built up strength in a particular niche market or have high entry barrier also fall into this category.
Bear in mind that there are risks in investing in these stocks. As growth potential is something which has yet to be realized and with the fast changing business environment, these companies also bear relatively higher risk in the event their products or services fail to catch-up with the latest development within their market.
So, which one do I choose?
By now, you should have a basic understanding an income stocks and growth stocks and how they differ. In order for you to decide which one to invest in, you will have to look at your own situation and determine your financial goals. Generally, if you fall within any of the following categories, income stocks would be more suitable as you would benefit from the lower risk and relatively higher predictability that income stocks have:
•you are looking at earning regular income from the stock market to support your expenses; or
•you are currently approaching the retirement stage and relying on the income from the stock market for lifestyle maintenance; or
•you are just about to start investing in the stock market.
On the contrary, investing in growth stocks would be the choice for you if:
•you currently have a pool of money and you would like to look for long-term investment for capital appreciation
Know what you are buying
Purchasing the stock of a company essentially means owning a piece of the business and if you strongly believe that the company of your interest has good potential and the fundamentals of the company are sound, then, trust your instincts and go ahead with it. However, contrary to what some may believe, remember that not all companies in the latest and hottest industries are good investments. Do not invest in biotechnology stocks just because everyone is or everyone tells you to. Always remember that you must understand the business of the company of your choice and how the company makes profit before investing in it as growth stocks tend to carry high risk due to the uncertainties in the business. Do some research to minimize your chance of losing money.
The whole point of making an investment is to make money, regardless of whether it pays you dividend income or capital gain. However, depending on your personal needs - whether you need the money for short term use or long term wealth accumulation, you should tailor your portfolio to suit your situation. In fact, you could even be a bit adventurous and combine the two and look at the gain as a total return approach.
This article was written by SIDC and Mr Ooi Kok Hwa, a holder of a Capital Markets Services Representative’s Licence to carry on the business of investment advice under the Capital Markets and Services Act 2007. The information provided in this article is only for educational purposes and should not be used as a substitute for legal or other professional advice.
What are Income Stocks?
However, you need to watch out for the interest and inflation rates when investing in these stocks. They are sensitive to the increases in these rates. When the interest rate increase and if the dividend yield of a particular income stock remains the same, or worse still, lower than the interest being paid by other investment options (such as corporate bond or bank’s fixed deposit), the price of this stock may go down. In addition to this, in a situation where the inflation rate rises and if the stocks are maintaining the same dividend rate year after year, in real terms the dividend will become lower.
What about Growth Stocks?
Bear in mind that there are risks in investing in these stocks. As growth potential is something which has yet to be realized and with the fast changing business environment, these companies also bear relatively higher risk in the event their products or services fail to catch-up with the latest development within their market.
So, which one do I choose?
By now, you should have a basic understanding an income stocks and growth stocks and how they differ. In order for you to decide which one to invest in, you will have to look at your own situation and determine your financial goals. Generally, if you fall within any of the following categories, income stocks would be more suitable as you would benefit from the lower risk and relatively higher predictability that income stocks have:
•you are looking at earning regular income from the stock market to support your expenses; or
•you are currently approaching the retirement stage and relying on the income from the stock market for lifestyle maintenance; or
•you are just about to start investing in the stock market.
On the contrary, investing in growth stocks would be the choice for you if:
•you currently have a pool of money and you would like to look for long-term investment for capital appreciation
Know what you are buying
Purchasing the stock of a company essentially means owning a piece of the business and if you strongly believe that the company of your interest has good potential and the fundamentals of the company are sound, then, trust your instincts and go ahead with it. However, contrary to what some may believe, remember that not all companies in the latest and hottest industries are good investments. Do not invest in biotechnology stocks just because everyone is or everyone tells you to. Always remember that you must understand the business of the company of your choice and how the company makes profit before investing in it as growth stocks tend to carry high risk due to the uncertainties in the business. Do some research to minimize your chance of losing money.
The whole point of making an investment is to make money, regardless of whether it pays you dividend income or capital gain. However, depending on your personal needs - whether you need the money for short term use or long term wealth accumulation, you should tailor your portfolio to suit your situation. In fact, you could even be a bit adventurous and combine the two and look at the gain as a total return approach.
This article was written by SIDC and Mr Ooi Kok Hwa, a holder of a Capital Markets Services Representative’s Licence to carry on the business of investment advice under the Capital Markets and Services Act 2007. The information provided in this article is only for educational purposes and should not be used as a substitute for legal or other professional advice.
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