Income Vs Growth Investments: Which is Best For You?

Investing into assets like…

• Stocks

• ETFs

• Real estate

…has been a fundamental part of building wealth for decades, and has helped millions of individuals build generational wealth.

But, one debate has been going on for decades, and it’s to do with what kind of investments are better…

Investments that prioritise providing you with an income.

Or.

Investments that prioritise appreciating in value.

So, I’m going to talk about the positives and negatives of both types of investment, so you can decide which approach is best for you.

Income Investments

An income investment is an asset, or asset class, which prioritises rewarding investors with a regular income, simply for owning the asset.

Some common examples include:

• Dividend stocks (dividend income)

• Dividend ETFs (dividend income)

• Real estate (rental income)

• High yield savings account (interest income)

These 4 are assets to prioritise if you favour receiving an income from your assets, over watching them grow in value.

Sure, some assets can do both, and in truth, a lot of assets will do both, but these 4 will certainly favour the income side of wealth generation.

Benefits of Income Investments

Passive Income Streams

Income investments like dividend stocks will provide you with passive income, and enable you do open up new income streams, simply for being an investor.

Sure, it won’t be a lot, but it’s better to put your money to work, rather than letting it gather dust, whilst falling in value due to inflation.

A dividend yield (%) is the percentage you’ll receive per share, per year.

So, if you own a share for $100, at a 3% yield, you’ll earn $3 per year.

Not a lot, but it can soon add up if you’re committed to the long term.

Returns Regardless of Market Conditions

The stock market is cyclical, meaning there are periods when it goes up (a bull market) and periods when it goes down (a bear market).

But, when it comes to dividends, and income, these aren’t affected by market conditions, but rather by the performance of the company or asset that you’re invested in.

Now some companies may need to reduce their dividends in bear markets or times of financial turmoil, but this is rare, and the two aren’t strongly correlated.

This means that whilst growth investors are losing value, you can keep stacking those dividends regardless of where the market is headed in the short term.

Reinvest to Compound Returns

The final benefit I want to talk about is what Albert Einstein called the eighth wonder of the world: compound interest.

The idea of dividends, especially when you’re just starting, isn’t to spend the dividends.

It’s to reinvest them, so your investment portfolio is continuously growing.

As a result, every time you receive a dividend, it’ll be bigger than the previous, because you’re earning dividends from a continuously growing investment portfolio.

We call this compound interest, and it’s something that can help you retire decades before your peers.

The key to taking advantage of compound interest?

Start investing ASAP!

Drawbacks of Income Investments

Opportunity Cost

There’s always an opportunity cost when it comes to investing, and you soon realise that investing is more psychological than you think.

I recently mentioned that you’re better off in a bear market with income investments, as you don’t have to worry about the market conditions.

But, when the opposite occurs, and the market is going up, you can find yourself losing out on a lot of potential growth by being over-exposed to income investments, and under-exposed to growth investments.

As a result, you could fall victim to FOMO (Fear Of Missing Out) and make poor choices which will affect your overall performance.

Dividends Can Change

This isn’t a huge problem, but it’s worth discussing.

The dividend yield of an investment is public information, but it isn’t set in stone.

Depending on things like:

• Market conditions

• Business performance

• Cash levels

The dividend yields of a company could fluctuate, so it’s worth keeping up to date with your investments, and how they’re performing.

Lack of Growth

Adding to the first downside, when markets are up, income investors can often find themselves lacking significantly in performance in comparison to growth investors.

Some big tech stocks like:

• Meta (+169%)

• Microsoft (+61%)

• NVIDIA (+261%)

Have grown absurd amounts over the past year.

Figures you won’t get remotely close to, if your prioritisation is income.

Sure, that’s not to say that income stocks can’t pull these numbers.

But, the fact that dividend stocks choose to pay investors a dividend, rather than reinvesting all their profits back into the business, shows that their growth potential is more limited.

Growth Investments

Growth investments are assets, or asset classes that prioritise appreciating in value, rather than providing investors with an income.

Examples of growth investments include:

• Growth stocks

• Growth ETFs

• Cryptocurrency

• Commodities (Gold etc.)

Especially in the stock market, growth stocks would rather invest their cash back into the business, rather than issuing a dividend. This is so they can continuously grow the business and keep investors happy with a more valuable company.

Benefits of Growth Investments

Greater Upside Potential

Like I discussed above, the upside potential in growth investments is significantly higher than that of dividend investments.

Sure, income investments can still grow in value, but if you’re comparing the two forms of wealth generation…

• Income — You’ll do well to gain a 5% annual yield in the stock market.

• Growth — The US Stock Market has averaged an 8–10% annual return since WW2.

When it comes to returns, growth is clear.

Market Leaders

The largest companies in the world have been classed as growth investments for some time.

Companies like…

• Apple

• Microsoft

• Tesla

• Google

…are all growth stocks, who prioritise growing the business by reinvesting profits.

Some of these companies are multi-trillion dollar companies, which is reassuring for an investor who wants to find a good balance between risk and reward.

Growth doesn’t have to be high risk, when you can invest into some of the biggest and most well known brands on the planet.

Less Capital Needed

Higher returns on growth investments is good for investors who might not have that much money to invest with.

• Investing $1,000 into a stock which gives you a 2% dividend yield will give you a $20 annual return, plus any value appreciation.

• Investing $1,000 into a stock which might appreciate 30% in a year, will give you a $300 annual return, plus any dividend on the stock.

Sure, the risk is higher, but if you’re starting small, risk is what you need if you want to build real wealth.

Drawbacks of Growth Investments

Could Be Risky

Growth investments present more fundamental risk to the investor, as there are more factors which could affect the performance of your investments:

• Company performance.

• Market conditions.

• Investor sentiment.

• Current affairs.

• Economic outlook.

You could invest into a business that’s performing very well. But, if the market is experiencing a sell-off, you could still find yourself at a loss, regardless of how well the business is doing.

More Research Required

The greater the risk of an investment, the more important it is to have a good amount of knowledge on what you’re investing into.

When you invest in assets without knowing what it is, or what it does, you’re not investing.

You’re gambling.

This means growth investments typically require a greater deal of research than more steady income investments.

I mean, you don’t need to, but it would be foolish not to.

Reliant on Appreciation

When you buy an asset for its income, or dividend, you know that there’s a guarantee that each month or each quarter, you’re receiving that dividend.

But, when it comes to growth, you have zero guarantees.

Even in a bull market, there’s no guarantee your investments rise in value.

If anything, this emphasises the importance of diversification, and how you should be exposed to broad market ETFs, rather than just a handful of individual stocks.

But regardless of this, it’s an important factor, which emphasises the importance of having good knowledge on what you’re investing into.

Conclusion

The conclusions for these debates aren’t always the best, because like most things, it depends on your own personal preferences, which is something that I don’t know.

But, if you’re still unsure, look at it this way.

Income investments are safer, but with historically lower long term rewards.

You want to prioritise these if you’re older, or starting off with more money, as you want to take on less risk.

But, if you’re starting with say $1,000, you’ll get nowhere by prioritising a 2% dividend yield.

If you’ve got $1,000,000, a 2% yield would be a tidy side income, though.

So, if you’re starting small, you want to prioritise growing that sum.

The truth is, the best way to learn what’s best for you is trial and error.

You could start with a 50/50 split, and after a few months or a year, you might have a preference.

But, knowing the key differences will help you start.

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