When newcomers to investing in the stock market ask me for ideas, they usually want tips for shares that are likely to grow rapidly. And I honestly don’t know how to respond.
I do sometimes invest in growth candidates myself, and right now I have a small holding in Sirius Minerals. But I don’t like to pass on such ideas to inexperienced investors, because they’re not prepared to take a wipeout should a growth pick go wrong. That often happens, and it would be irresponsible of me to expose them to risk they’re not ready for.
For every one of my past successes in small-cap growth companies, I’ve had my share of failures. And you know what? I reckon my overall investment performance from growth picks in my earlier years has probably been about the same as I’ve had in later years from mature FTSE 100 companies paying good dividends.
But I also don’t want to just tell newcomers to buy boring blue-chips and be happy with a steady dividend income stream as I have done with insurer Aviva (and see any share price appreciation as a bonus), because that’s likely to kill their enthusiasm. So what should you go for, growth or income?
False dichotomy
Growth investors are typically people who don’t want to spend any of their investment cash now, and that’s great — the longer you can leave it invested, the more it will be worth when you finally come to use it and enjoy it. So they want to build the biggest cash pile they can.
Income investors, on the other hand, are often older folk who are in or nearing retirement and they want to start enjoying the fruits of their decades of careful saving and investing.
But does that require two different types of investing? I say no.
If you want capital growth from dividend-paying shares, just reinvest the dividends each year in new shares. And if you want income from growth shares, just sell some each year.
Two examples
Suppose you’d invested £1,000 in AstraZeneca, a very large and mature dividend-paying company, at the end of 2003. With dividends reinvested every year, you’d be sitting on £3,000 by the end of 2013. (That’s a little out of date, but it’s a calculation I conveniently had to hand, and since 2013 AstraZeneca has continued to pay good dividends — and its shares have put on a further 29%.) Pretty impressive growth, wouldn’t you say?
On the other hand, a friend of mine wisely invested in Apple shares 20 years ago as a growth investment. He’s retired now and needs income, so has he sold all his Apple shares and invested in the biggest dividend yields he can find? Of course not, he just sells a few shares when he needs to — and he still sees Apple as a great long-term hold.
Just buy the best
A well-managed company will do the best it can for its shareholders with its profits, be that ploughing it back into a growing business or paying it out as dividends, or a mix of the two. And investors can decide for themselves whether to reinvest for growth or take cash, regardless of the nature of the company.
The question of growth vs income is, to me, a bogus one that distracts investors from seeking out the very best companies.
