Should I buy shares for income or for growth?
You make investment in shares either for a regular income or growth of your investment. In an ideal world, you would like to invest in the shares which offer regular deividends and record higher capital growth. While it might be possible for some companies to combine the two, but often it is not the case. So you have to make a choice between investment in dividend stocks or growth stocks.
For investors with a long-term investment horizon, a growth strategy might be a good choice. An individual of a young age, lets say 35 years, if invest in dividend yielding stock, would not be an optimal investment strategy in my opinion. He might end up asking himself at the retirement age, ‘where the hell is the feast?’.
Investment in dividend stock is a great source of passive income for those looking for a regular stream of income, especially if you are retired. The point to understand here is how much you get in terms of dividend with respect to your investment, known as dividend yield, which is as low as 2% to 3% in Australia. Thus, an investment of $100000 will lead to only $3000 dividend a year. You must ask yourself if it is worth to bear the investment risk with such dividend yield.
It is typical that retired individuals want to invest in dividend stocks in order to generate more income alongwith their pension, and for those who are at the beginning of their investment carrier prefer to invest in growth stocks. But with prolonged life span, bigger needs and higher expectations, the traditional model for investment preferences needs to be reevalueted.
Some investment advisors believe that the traditional way of seeing the growth and income is ‘one of the greathest myths of the modern time’. High and low dividends are not particularly good or bad themselves. These investment styles may suffer if being used like this, as the working life span expands and now people retire late as compared to many years ago.
The investment in shares for dividend call for interest rates risk as well. If the interest rates are slowing rising in the country, the dividend yield will slow down and the vice versa. Thus, you have to keep an eye on the interest rates movement to better enjoy your investment.
Another important point is to match your investment style with your age. At an early age, go with other options instead of a 2-3% dividend yielding stocks, but at a later stage dividend stocks are good options as associated with low risk and low taxes. But rememebr, nothing works alone! The diversification is the best investment strategy ever.
Thus, the solution is in diversification. Instead of opting out for high dividends without good chance for growth, or choosing growth without any dividends, combining these two approaches will allow you to create a portfolio with reasonable dividend earnings along with with a room for growth as well.