You may wonder if you should buy an income investment because it's a value or a growth stock?
Mainstream Financial Advise Talks About Value and Growth Stocks
This could happen if you read a lot of average or common stock market investing advice. Many authors advocate buying value stocks. Others advocate buying growth stocks.
There's no strict meanings that everybody conforms to. In general, a value stock is a company which has a low Price/Earnings (P/E) ratio. This indicates the market does not expect this company to grow very far or very fast. It may be older, more established in its industry. It may have a reached a certain point of saturation, where its only growth comes from growth in population or moving into other countries. Maybe they pay dividends or maybe they don't.
In short, value stocks are companies considered old, slow and . . . boring.
Growth Stocks Excite the Market
Growth stocks, however, are companies with exciting stories. Often, though not always, they're in high technology. They generally have high P/E ratios. They've usually already demonstrated fast growth, and everybody expects them to keep growing fast, because they're the next new thing. They never pay dividends, allegedly because they need all their cash to finance the growth everybody expects. The market expects their share market price to grow fast and high, just like the company's business.
In short, growth stocks are companies considered new, quick and . . . sexy.
All other things being equal, it's obvious growth stocks are better.
However, other things are never equal. One extremely important factor governing investing success that investors almost always overlook is the initial price they pay.
People Pay Too Much for the Growth They Do Get
It's better to receive 10% growth when you buy a stock for $100 than to receive 5% growth. However, growth stocks sell at higher P/E ratios, which means they're relatively more expensive. You might pay $300 for that 10%.
Therefore, value stocks offer more growth for the money you pay. Or you could say that investors pay too much for the growth stocks they buy. A BMW may be a better car than a Ford, but it's not worth $1 million.
People who deliberately buy value stocks are value investors.
In his book THE FUTURE FOR INVESTORS, Dr. Jeremy Siegel studied the relative fates of "value" stock Standard Oil versus "growth" stock IBM from 1956 to 2002. Investors who reinvested their Standard Oil dividends during that period made a lot more money than IBM investors who depended on that stock to grow.
Yes, IBM did grow more than Standard Oil, but not enough to compensate investors who paid too much for it.
We Want Income, Not Market Price Growth
For income investors, the distinction is pointless, because we're buying for income, not growth in share price. My advice is, so long as the stock continues to pay dividends, don't sell it.
I often refer to all stocks that don't pay dividends as "growth" stocks. They may or may not have high P/E ratios, exciting stories and great prospects. However, if a company doesn't pay dividends, the only other reason to buy its stock is for growth, because you can't expect anything else. That doesn't mean it actually will grow, of course.
I Do Look for Income Growth Investments
However, I do advocate buying for growth in dividends. You can't predict the future, but it's a good guess that high dividend paying companies such as Real Estate Investment Trusts and Master Limited Partnerships will continue to grow their dividends higher than an outmoded manufacturing company that hasn't raised their dividends in the past five years.
I don't advocate sticking to one type of investment, so buy consumer stocks with long histories of raising dividends, utility stocks, Real Estate Investment Trusts and Master Limited Partnerships.
Bond Income Doesn't Grow, Which is a Weakness
Bonds are also a form of income investment, but their income does not grow over time. It remains fixed. Unless you're really old and need as much income as you can get right now, emphasize stocks in your portfolio.
Buy every income investment that will grow its dividends over time, and you'll grow wealthier every year.
Author Resource:
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