Income investing vs growth investing

People often invest for all sorts of reasons, and your approach to investing may vary depending on your specific investment goals.

 
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Two of the most common investment approaches are income investing and growth investing.

In this article, we’ll learn about:

  • The difference between income investing and growth investing
  • How to use the approaches to try to achieve your investment goals
  • How to invest for growth or income

Growth investing vs income investing

The main difference between these approaches lies with how you manage the income earned from investments. 

Income investors

Income investors aim to create a reliable and steady cash flow by collecting regular payments of dividends from shares, income from funds and ETFs or interest from bonds & gilts.

In this way, their investments act like a second job, paying them in intervals throughout the year.

Growth investors

Growth investors aim to increase the overall capital value of their portfolio by reinvesting the income earned from their investments to maximise growth.

The reinvested income can buy more of the shares, funds or ETFs, which will potentially grow in value too. In simple terms, your returns also earn returns – a benefit known as compounding.

Which is most suitable for me?

The decision whether to reinvest income or not will depend on your personal circumstances and your specific investment goals. Some key things to consider are:

  • Investment horizon: income investing can provide benefits sooner. Growth investors often need a long-term view to benefit from compounding.
  • Risk tolerance: high-growth assets may involve higher risk compared to established dividend-paying assets.
  • Employment status: income investing could be particularly useful if you’re in retirement or looking to shift away from full-time employment
  • Age: growth investing may appeal to younger individuals at the start of their investing journey who are looking to build wealth for their long-term life goals.

In reality, most investors will hold a mix of both growth-focused and income-focused investments in their portfolio, making adjustments over time as their financial situation changes.  

Which is most suitable for me?

The decision whether to reinvest income or not will depend on your personal circumstances and your specific investment goals. Some key things to consider are:

  • Investment horizon: income investing can provide benefits sooner. Growth investors often need a long-term view to benefit from compounding.
  • Risk tolerance: high-growth assets may involve higher risk compared to established dividend-paying assets.
  • Employment status: income investing could be particularly useful if you’re in retirement or looking to shift away from full-time employment
  • Age: growth investing may appeal to younger individuals at the start of their investing journey who are looking to build wealth for their long-term life goals.

In reality, most investors will hold a mix of both growth-focused and income-focused investments in their portfolio, making adjustments over time as their financial situation changes.  

What can I invest in?

With a Lloyds Share Dealing Account or ISA you have access to a wide variety of investments with a ‘growth’ and ‘income’ flavour. We’ve given a few examples below.

Income-focused investments

  • Shares: you may consider investing in established, cash-generating companies with a strong reputation for paying significant dividends to shareholders. 
  • Funds and ETFs with an Income (“Inc”) label, which indicates that your portion of income earned in the fund will be paid out in regular intervals. 
  • Investment Trusts: some are set up to pay out any dividends earned, like Income funds and ETFs.
  • Bonds & Gilts: pay a fixed income. 

Growth-focused investments

Shares: you may consider investing in companies that reinvest profits back into the business (rather than paying dividends) to boost growth. Small-cap stocks often fall under this category as the businesses are trying to grow and expand.

Funds with an Accumulation (“Acc”) label, indicates that your portion of income earned from the fund is automatically reinvested into the fund.

ETFs focusing on growth sectors or emerging markets.

Bonds and Gilts can be used for fixed returns.

Please remember that the value of investments and the income from them can fall as well as rise, and you may get back less than you invest. If you’re not sure about investing, seek financial advice. There will normally be a charge for that advice.

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The Lloyds Bank Direct Investments Service is operated by Halifax Share Dealing Limited. Registered Office: Trinity Road, Halifax, West Yorkshire, HX1 2RG. Registered in England and Wales no. 3195646. Halifax Share Dealing Limited is authorised and regulated by the Financial Conduct Authority under registration number 183332. A Member of the London Stock Exchange and an HM Revenue & Customs Approved ISA Manager.